Murray River near Loxton, SA

Economic assessment of acquiring water for environmental flows in the Murray Basin

New research into the economic impact of reallocating water in the River Murray Basin from agriculture to the environment supports targeted water buying for environmental flows.

The research carried out as part of the Water for a Healthy Country Flagship, and published in the Australian Journal of Agricultural and Resource Economics, also recommends variation in the volume of water acquisition in wet and dry years and broadening of free trade of water between the regions.

The paper, Economic assessment of acquiring water for environmental flows in the Murray Basin, finds that potential revenue gains, to the irrigated agricultural sector as a whole resulting from free water trade, are large enough to offset the revenue losses expected from reallocating 500 GL of irrigation water to the environment.

This key finding supports the Council of Australian Governments, which, through the National Water Initiative (NWI), has committed $500 million to buy about 500 GL of water for environmental flows.

The work stems from concerns about water allocation security, water quality and ecosystem health, due to changes in land use and river management in the Murray-Darling Basin. The paper states that one indicator of the changed river management is that ‘the median annual flow of water to the sea was now only 27 per cent of the natural (pre-development) flow'.

The study acknowledges that ‘recovering water from existing consumptive water users may involve significant social, economic, and political challenges'.

It finds that ‘irrigation net revenue would be expected to decline if water for the environmental flows was acquired through reductions in irrigation water allocations and free trade between regions was not allowed'.

Acquiring environmental flows from across the Basin on a pro-rata basis decreases irrigation net revenue by $61 million per year (2.4 per cent) when no inter-regional water trade is allowed. If the water is taken only from selected low value regions, the cost to irrigators is estimated to be less, at $34 million per year.

The study also finds that net irrigation revenue loss is $75 million per year less when more water is acquired in wet, and less in dry years instead of acquiring a constant volume of water across years.

For a scenario involving inter-regional trade and water taken from all the regions across the Basin, the report concludes that ‘net revenue is estimated to be $54 million (2 per cent) greater than baseline levels. Slightly greater gains ($56 million) are estimated to result when environmental water is acquired from low-value regions only'. Thus, when free trade is allowed, the report concludes, ‘there is minimal gain from targeting water acquisition'.

In the no-trade scenario, a further conclusion was that spatially targeted water acquisition for environmental flows, from low opportunity cost regions, could substantially reduce the costs of acquiring environmental flows.

Accounting for external salinity costs does not change any of the report's major conclusions regarding the net benefits of environmental water acquisition and water trade policy in the Basin.

The paper states that: ‘Positive external benefits are estimated as a result of water trade in net supply regions where reduced irrigation is expected to result in water table level declines and consequent improvement in yields. However, these benefits are expected to be outweighed by negative salinity externality impacts in net demand regions'.

Overall, the externality impacts of water trade are estimated to be quite modest in comparison to the benefits of trade. The net externality impacts are estimated to be about $1 million a year which ‘is small relative to the aggregate financial gains from moving to free-trade in water', the report says.

Reference: M. Ejaz Qureshi, Jeff Connor, Mac Kirby, Mohammed Mainuddin (2007). Economic assessment of acquiring water for environmental flows in the Murray Basin Australian Journal of Agricultural and Resource Economics 51 (3), 283–303.

Contact:
M Ejaz Qureshi, CSIRO Land and Water
Email: ejaz.qureshi@csiro.au

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