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It’s the water market, Darling: what’s behind the MDB sell-off

The government wants to sell its environmental water in the Murray-Darling Basin to cotton farmers. Is this dodgy, or is it market economics to make Adam Smith proud?

The government is spending billions buying water from farmers to help the Murray-Darling Basin’s long-suffering environment. So when the government starts to sell water from the environment back to farmers (and cotton farmers, at that), alarm bells ring out.

Bureaucrats yesterday announced up to 10 billion litres of environmental water in a New South Wales catchment would be sold back to irrigators. Some media reports — and the Greens — suggested the Coalition was backing away from the $10 billion plan to protect the Murray-Darling to shore up the budget (The Australian reported the tender was “to raise cash”). Other media reports painted the sale as nothing to worry about for conservationists. Which is closer to the truth?

Drill down into the facts, and it seems this tender is not dodgy (though there are a few quirks in it). However, it could kick off a trend to water down the Murray-Darling rescue plan.

The basin is the country’s food bowl and stretches through parts of Queensland, NSW, the ACT, Victoria and South Australia. Irrigators were taking too much water out of it for their cotton, grapes and lemons, causing ecological disasters in droughts, so former PM John Howard rode to the rescue with a massive and well-funded salvage plan in 2007. The heart of it is that the government enters the (very complicated) water market and buys water, which is set aside for the environment.

This is the Coalition’s baby, so don’t assume the Abbott government is out to gut the plan. However, the end of the terrible millennium drought (2000-2010) meant the issue rather fell off the radar, and plenty of experts argued the final figure on how much water should be bought up was too low.

The next major drought will show whether the plan has worked. Watch out for those front-page pics of cow skeletons in dusty paddocks.

In the latest development, the Commonwealth Environmental Water Holder (which is in charge of buying and selling the government’s water, supposedly at arm’s length) yesterday released a tender to sell up to 10 gigalitres of its water in the Gwydir catchment to irrigators. It’s the first time this has happened. The Gwydir is near the northern NSW town of Moree. It’s via a reverse tender, and here’s the form if you want to bid …

The media release states:

The Commonwealth Environmental Water Holder David Papps said that environmental conditions had guided his decision to sell in the Gwydir. ‘Local floodplains require a drying phase after a number of consecutive wet years. This presents the opportunity to sell a small portion of the Commonwealth’s water allocation,’ Mr Papps said … The Commonwealth Environmental Water Holder will use the proceeds of the sale to purchase water at another time, within either the Gwydir or elsewhere in the Murray-Darling Basin, which will provide greater environmental benefit.”

The decision may be less noble than it sounds. The water market has been going gangbusters in the Gwydir in the last two months; a lot is being traded, and the price has risen. The Environment Department itself says this is because of high demand for water due to “recent hot and dry conditions”, and it notes “irrigators require further water allocations to finish off the current season’s cotton crop” (cotton is a notoriously thirsty crop). The Gwydir’s dams are 45% full, down from 84% a year ago.

So the bureaucrats may be selling off their water because they can get a good price for it, not because it’s not needed for the environment. They didn’t sell off the water when the Gwydir was flooded in 2011-12, instead waiting for scarcity and the demand that followed. It’s market capitalism 101, but should the government be using the market to make money in this way?

It’s perfectly legal for the government to sell back its water under the Water Act (sections 105 and 106). There are two prerequisites: either the water is not required to meet the water plan for the catchment in question, or it’s allowed if the government can get more environmental benefit from flogging off a parcel of water and using the money to buy water elsewhere. The money stays with the CEWH but doesn’t have to be used to buy more water. So The Australian take note: it doesn’t look like the Abbott government can use this process to make budget savings.

As an aside, the CEWH is selling water allocations (rights to use water in a particular season) in Gwydir, not permanent water entitlements (a standing licence to irrigate, which the farmer then receives an annual allocation of, based on rainfall, etc). It has the right to sell both.

Crikey asked water experts what they thought of the Gwydir sale. Arlene Buchan, healthy rivers campaigner at the Australian Conservation Foundation, has no problem with the principle. “[The government] doesn’t have to use every single drop in every single region that it has some,” she said. Buchan said the process should be transparent: “We’ll be watching closely to see that it’s all done properly.”

Australian National University water economist Quentin Grafton says the sale is fine so long as the CEWH functions independently from the government, and the money is kept in a special CEWH fund and doesn’t go into consolidated revenue. Grafton co-wrote a comprehensive paper on how the Murray-Darling Basin water market works, published last week.

But John Williams, founding member of The Wentworth Group (scientists interested in conservation), says selling environmental water back to irrigators is “the beginning of the slippery slope”. Williams says the Basin Plan has already been pulled back and “what we’ve got is far too little water in the public purse, and no provision for climate change”. The environment has been short-changed, and selling off some of its water won’t help, he says. Williams warns people to watch out for the government selling off its permanent water entitlements (as opposed to allocations, as in Gwydir).

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  • 1
    Posted Tuesday, 21 January 2014 at 2:17 pm | Permalink

    CATHY ALEXANDER: I am sorry to be negative, but years of watching the tortuous lies, half-truths and lining their own pockets prevent me from believing this MDB plan of the Coalition is devoid of trickery.

    (The above is not to suggest the Labor Party to be a bunch of roses.)

  • 2
    AR
    Posted Tuesday, 21 January 2014 at 5:34 pm | Permalink

    Is “a trend to water down the Murray-Darling rescue plan. meant to be a pun? Or just the banality of modern writing which can’t distinguish a cliche from a metaphor from an absurdity?
    BTW, it is NOT “the government’s water
    As for cotton “ a notoriously thirsty crop, the idiocy of competing on the world market (it ain’t required domestically - too expensive…sic!)with the Mississippi & Nile irrigated mass growers is…errr …insane, it would as dumb as trying to grow rice and export it to Asia…oh, wait.
    Lake Alexandrina had been saline/brackish for millenia and Sturt et al reported that the Darling was often salty, for obvious reasons.

  • 3
    Cathy Alexander
    Posted Wednesday, 22 January 2014 at 12:54 pm | Permalink

    AR, it was a cliche deliberately used to see if you were paying attention, which you were.

    Why Australia grows cotton at all would be a good story in itself - and how much we grow. But what’s the problem in growing it just in flood years? It’s an annual crop …

  • 4
    AR
    Posted Wednesday, 22 January 2014 at 4:43 pm | Permalink

    Cathy - although cotton is an annual, unfortunately it is so hungry and sensitive a crop that the inputs of fertiliser, pesticide & herbicide pollute the soil thereafter, not to mention the nasty associated weeds & pest (don’t wanna break into a blues number ‘bout ole boll weevil but ..).
    About the only other crop which leaves the soil in so wrecked a state is tobacco which we also grow, with subsidy. It is so crappy that the only consumers used to be prisons & the military rations.

  • 5
    Posted Thursday, 23 January 2014 at 12:39 pm | Permalink

    The ease with which our farmers plant eco unfriendly crops is breathtaking. Cotton being a prime example and rice in all but the most northern parts of Australia is willfully misusing
    our water.

    I have a horrible feeling we grow tobacco as well. Can anyone verify this?

  • 6
    AR
    Posted Thursday, 23 January 2014 at 3:11 pm | Permalink

    VA - see mine above, and
    Tobacco growing commenced during Australia’s early years of settlement. Governor Macquarie experimented with plantings at Emu Plains in New South Wales in 1818, and by the 1820s tobacco was cultivated by farmers in the Hunter Valley. During the 1850s growing extended to Victoria and Queensland. It is likely that some proportion of the early crop was intended to supply the colony with the makings of pesticide for use in ridding sheep of parasites.6 Growing reached its peak in the early 1970s, when nearly 16 000 tonnes of leaf were sold annually,7 but by 2006 the crop yielded under 4000 tonnes.8 Prior to deregulation of the market, most Australian leaf was purchased by local manufacturers.9
    Major influences contributing to the downturn in local tobacco growing include declining tobacco consumption in the Australian population, and successive reductions in the protective tariff on Australian leaf during the 1990s, which permitted manufacturers to purchase leaf more cheaply on the international market (see below).9 This lead to an increase in diversion of Australian leaf into the illegal tobacco trade9 (see also Chapter 10, Section 10.9).
    Commercial tobacco farming no longer occurs in Australia. The industry began to wind down during the mid-1990s, with successive announcements at state and federal level for government-financed restructuring grants (exit grants) to tobacco farmers to assist them in leaving the industry (see below).The Tobacco Research and Development Corporation was abolished in 2003.21
    The last sales contracts in Northern Queensland were filled in early 2004,22 and in Victoria and southern Queensland a majority of growers voted in support of a federal government and industry-funded buyout of the leaf growing industry announced in October 2006. All outstanding sales transactions were expected to be completed in 2009.23

  • 7
    Posted Friday, 24 January 2014 at 10:16 am | Permalink

    AR: Thank you for answering my question and I am sorry I failed to pick up the part where you mentioned tobacco.
    It’s hard to believe how our rural population happily ignore any long term potential for harm. FFS when planting a water hungry crop in land that is semi desert is outright lunacy.

    Thanks again for answering my question.

  • 8
    Andrew MARTIN
    Posted Saturday, 25 January 2014 at 3:03 pm | Permalink

    The link to the paper by Quentin Grafton doesn’t work - Any chance of getting the real link?
    By the way, though the media and public like to say that cotton is ‘notoriously’ water intensive it is in general, no more so than wheat, rice or other crops grown in the same soil and climate (that’s called the Penman Equation). What is different is that many cotton farmers use inappropriate irrigation techniques (probably suggested by the American companies when they introduced cotton in the 60s) and high rates of fertiliser and pesticide use and soil depletion are problems with cotton as they are/were with tobacco.

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