Economics of Restricting Rural-Urban Trade Prof. Mike Young Research Chair, Water Economics & Management School of Earth and Environmental Sciences The University of Adelaide Friday 1 st September 2006

2 Rural-Urban Trade Experience Water trading is occurring in  California  Texas  China  Adelaide (perm.)  Perth (temp. only so far) Pipelines, pumps and gravity  Kalgoorlie pipeline - 600kms  Adelaide pipeline - 48kms over up 418m  Whyalla, Port Augusta and Pt Pirie – Two 379 km pipelines

3 Urban Water Management Challenges Reducing Supply  Adverse climate change  Environmental flow enhancement Increasing Demand  Population increase  Households  Commercial and Industrial  Without more new water, what can we do?

4 ABS indicative population projection - 25% more in 25 years

5 Climate Change – Admitting it

6 Supply responses Supply solutions 1.Traditional sources  New dams in under-allocated systems  Accessing groundwater 2.Rural urban trading - in both directions  => Pipes and pumps  And Water is heavy 3.Desalination  Cost $1.00/KL to $1.50/KL 4.Recycling  Typically more expensive than desalination (economies of scale?) Can’t say “no” to everything

7 “Without Water” Study TERM-Water  The Enormous Economic Regional Model (CSIRO & Monash)  17 regions by 170 sectors Supply Assumptions  Eastern and Southern Mainland Australia decrease by 15%  Western Australia no further drop in supply  NT and Tasmania not supply restricted Water requirement per dollar of market output  Rural water use decreases by 34%  Urban water use decreases by 22%

8 Scenarios 1.No trading, no new sources, ABS projections (No Initiative = Same supply) 2.Urban-rural trading (Market determines supply) 3.Trade + New sources  a) Extra 80GL new $1.50/KL  b) Extra 120GL new $1.00/KL 4.Allow Wage-driven migration

Water Price $/KL Current Water price* No Initiative (Same supply)Trade Trade + 80 GL $1.50/kL Trade GL $1.00/kL Trade + 80 GL $1.50 plus wage driven migration Sydney Melbourne Brisbane- Moreton Adelaide Perth ACT

10 Shadow price increase Current Water price* No InitiativeTrade Trade + 80 GL $1.50/kL Trade GL $1.00/kL Trade + 80 GL $1.50 plus wage driven migration Sydney100%595%218%199%193%199% Melbourne100%509%134%131%129%132% Brisbane- Moreton100%827%205%188%182%177% Adelaide100%109%131%128%126%128% Perth100%1018%565%401%348%364% ACT100%291%136%132%130%133%

11 Change water use S2 – S1 (GL) Demand growth Non- agric. growth Agric. tech. change Water availability Agric effic. & leakage Reduced household requirements Total Crops & Livestock Dairy Cotton Rice Household Other Australia Urban demand for rural water involves relatively small volumes (61+171)/25,000 GL = 0.93%

12 Costs & benefits of introducing rural urban trade (% change) Consumption (S2-S1)Real GDPEmployment %% Sydney Murrumbidgee Murray NSW Western NSW Rest NSW Melbourne Mallee VIC Rest Irrig VIC Rest VIC Brisbane-Moreton Burnett-Darling QLD Rest QLD Adelaide Rest SA Perth Rest WA Tas & NT-1.3 ACT Australia10.60

13 S2 Urban – Rural Trading (S2%-S1 %)

14 Urban - Rural Trade Issues How much should do we worry about equity, given that water price - as an equity lever is very inefficient? How much do we expose urban & industrial Australia to rural price disciplines? Imagine  Households whose water charges are a direct function of the traded price of water and dam supplies  Industrial and Commercial Users with tradeable allocations  Developers having to buy the water to get sub-division approval  Households with an option and opportunity to trade “their” water allocations (Individually tailored inclining tarrifs)  People profiting from stormwater capture and waste water recycling

In cities, small volumes go a long way Contact: Prof Mike Young Water Economics and Management Phone: Mobile:

16 S1 Water use 2030 redistribution (GL) Demand growth Non- agric. growth Agric. tech. change Water availability Agric effic. & leakage Reduced household requirements Total Crops & Livestock Dairy Cotton Rice Household Other Australia000-3,18200

17 Demand growth Taste changes and non-agric. supply growth Agric. tech. change Reduced water availability Agric. water- efficiency gains and leakage reductions Reduced household water needsTotal Western NSW Adelaide Murray NSW Murrumbidgee Rest SA Rest Irrig VIC Rest NSW ACT Melbourne Sydney Brisbane- Moreton Perth S1 Decomposition of shadow price increase ($/KL)

18 Demand growth Taste changes and non- agric. supply growth Agric. tech. change Reduced water availability Agric. water- efficiency gains and leakage reductions Reduced household water needsTotal Western NSW Adelaide Murray NSW Murrumbidgee Rest QLD Rest SA Burnett-Darling QLD Mallee VIC Rest Irrig VIC Rest VIC Rest NSW Tas & NT ACT Rest WA Melbourne Sydney Brisbane-Moreton Perth S1 Decomposition of shadow price increase ($/KL)