1. 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. 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. 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. 4 ABS indicative population projection - 25% more in 25 years

5. 5 Climate Change – Admitting it

6. 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. 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. 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 water @ $1.50/KL  b) Extra 120GL new water @ $1.00/KL 4.Allow Wage-driven migration

9. 9 2032 Water Price $/KL Current Water price* No Initiative (Same supply)Trade Trade + 80 GL water. @ $1.50/kL Trade + 120 GL water @ $1.00/kL Trade + 80 GL Water @ $1.50 plus wage driven migration Sydney1.368.092.972.712.622.71 Melbourne1.175.961.571.531.511.54 Brisbane- Moreton1.2710.512.612.392.312.25 Adelaide1.301.421.701.661.641.67 Perth1.1211.406.334.503.904.07 ACT1.113.231.511.471.451.48

10. 10 Shadow price increase 2032-2001 Current Water price* No InitiativeTrade Trade + 80 GL water. @ $1.50/kL Trade + 120 GL water @ $1.00/kL Trade + 80 GL Water @ $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. 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 & Livestock22-18-1256-550-7 Dairy102-36441162-13287 Cotton-121-153-3-31713168-395 Rice-9722-2016-5716-120 Household-2937-13342-2861 Other6476394-23-43171 Australia0000000 Urban demand for rural water involves relatively small volumes (61+171)/25,000 GL = 0.93%

12. 12 Costs & benefits of introducing rural urban trade (% change) Consumption (S2-S1)Real GDPEmployment %% Sydney-0.2 -0.6 Murrumbidgee-4.5-4.6-3.6 Murray NSW-5.3 -4.1 Western NSW-11.0 -10.3 Rest NSW-1.9 -1.3 Melbourne1.4 0.4 Mallee VIC5.6 3.3 Rest Irrig VIC5.05.12.1 Rest VIC0.2 0.0 Brisbane-Moreton11.111.26.3 Burnett-Darling QLD-8.4 -4.3 Rest QLD-2.0 -1.6 Adelaide-2.3 -1.8 Rest SA-2.0 -1.6 Perth4.6 2.4 Rest WA-4.8 -3.1 Tas & NT-1.3 ACT-0.8 -0.7 Australia10.60

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

14. 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

15. In cities, small volumes go a long way Contact: Prof Mike Young Water Economics and Management Email: Mike.Young@adelaide.edu.au Phone: +61-8-8303.5279 Mobile: +61-408-488.538

16. 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 & Livestock99-6231586-815-774151-376 Dairy43-73-363-701219112-763 Cotton-43314-904-59678577-1057 Rice-19630-380-44833756-601 Household-869-91-142244-362-290 Other495583153-479-811-34-93 Australia000-3,18200

17. 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 NSW0.75-0.550.710.22-1.43-0.05-0.35 Adelaide0.610.310.501.07-1.56-0.820.11 Murray NSW0.61-0.170.510.41-1.13-0.050.18 Murrumbidgee0.61-0.170.520.41-1.12-0.050.20 Rest SA0.65-0.070.540.52-1.09-0.090.46 Rest Irrig VIC1.29-0.020.620.74-1.50-0.150.98 Rest NSW1.190.140.331.21-1.27-0.161.44 ACT2.952.55-0.691.16-0.22-3.801.95 Melbourne2.552.39-0.222.23-1.39-1.154.41 Sydney3.703.81-0.592.52-0.77-2.476.20 Brisbane- Moreton5.593.53-0.171.91-1.07-1.288.51 Perth6.575.82-0.170.40-1.18-1.979.47 S1 Decomposition of shadow price increase ($/KL)

18. 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 NSW0.75-0.550.710.22-1.43-0.05-0.35 Adelaide0.610.310.501.07-1.56-0.820.11 Murray NSW0.61-0.170.510.41-1.13-0.050.18 Murrumbidgee0.61-0.170.520.41-1.12-0.050.20 Rest QLD0.56-0.130.800.65-1.49-0.090.30 Rest SA0.65-0.070.540.52-1.09-0.090.46 Burnett-Darling QLD0.74-0.110.520.39-0.67-0.070.80 Mallee VIC1.18-0.080.840.78-1.75-0.140.83 Rest Irrig VIC1.29-0.020.620.74-1.50-0.150.98 Rest VIC1.27-0.010.580.72-1.21-0.151.20 Rest NSW1.190.140.331.21-1.27-0.161.44 Tas & NT2.090.161.110.59-2.09-0.371.49 ACT2.952.55-0.691.16-0.22-3.801.95 Rest WA4.231.441.760.78-3.45-0.534.23 Melbourne2.552.39-0.222.23-1.39-1.154.41 Sydney3.703.81-0.592.52-0.77-2.476.20 Brisbane-Moreton5.593.53-0.171.91-1.07-1.288.51 Perth6.575.82-0.170.40-1.18-1.979.47 S1 Decomposition of shadow price increase ($/KL)