Published 12 October 2017
While there are drier countries than Australia, after Antarctica, Australia is the driest continent on the planet. Yet, Australia is one of the world’s largest exporters of water. Australian water exports come primarily in the form of virtual water – the water used to produce the products we extract, grow or manufacture. This article questions the allocation of our scarce water resources in an unregulated market and proposes a more rational pricing mechanism.
Australian water: a scarce resource
While parts of Australia, such as North Queensland, receive significantly large rainfall, other areas, such as he Murray-Darling River Basin are not so plentiful. The long-run average rainfall in the basin is only 470mm per year (about half of Australia’s average). The water footprint network identifies the Murray-Darling as one of the most stressed river basins in the world based on average blue water scarcity. Blue water is the term used for fresh surface and groundwater, which includes the water in the rivers of the basin as well as the water stored underneath in the natural aquifers of the basin.
Australian water exports
Usually, water is not directly traded between countries. While some trade does exist, particularly bottled drinking water and water piped to neighbouring countries; due to the cost of transporting such a bulky and heavy commodity, water is not a highly-traded commodity. The global trade in water occurs through the trading of various water-intensive goods – virtual water. Australia is the seventh largest gross exporter of virtual water and the fourth largest net (exports minus imports) exporter after India, Argentina and the USA. (See WFN)
Water and cotton production in Australia
One of the largest users of this water resource in Australia is the production of cotton. Cotton production is one of the largest users of water in Australian agriculture. Australia is the eighth largest cotton producer and the third largest cotton exporter in the world. Over 95% of Australia’s cotton crop is produced in the Murray Darling River basin.
As many of the arguments supporting cotton are based on the value brought to the economy, it is appropriate to measure this value on a water usage basis. The table below calculates the value of production per mega litre of water used:
*Value per dollar is conservative as water usage is based on water usage for Production of meat cattle plus water usage for hay production. True value per GL is in the range of $ 8,409 – $21,414.
While the value of the cotton industry is significant, when measured against its use of water, particularly given the water strains in the Murray Darling River Basin where it is primarily grown, the cotton industry’s value is questionable.
Why does Australia export so much water through its cotton industry? Simple economics. If the combination of water cost, land availability and productivity make it a profitable activity, then a cotton industry will evolve. The key question then becomes: if water is so scarce, why is it so cheap as to allow this high water intensive crop to be so profitable? The answer to this lies in part in the complicated structure of water rights and water trading. Many claim that traded water markets, such as that created in Australia, establishes an adequate market price for water. However, as the only participants in these markets are generally the owners of water rights (historically due to land holding) and active users of water (irrigators), the needs of the ecosystem itself are often neglected.
While it is often argued that Australia is one of the most water efficient cotton producing countries in the world, the normal economic arguments of competitive advantage need to be tempered by the largely ignored realities of both water scarcity and acknowledgement of the inefficiencies in the pricing of water. A recent journal article by Jia, Long and Liu argues that the basic underlying economic premise of the water market is flawed and that water will be misused in arid regions due to the availability of land. Further arguments centred on the number of communities impacted or people employed are spurious because these communities could equally be supported, and jobs provided, by other, less water intensive, agricultural activities.
How can we address Australian water scarcity?
For Australia to ensure that the best use of our scarce water be achieved, a more progressive water charging system needs to be introduced. Agriculture that is highly water intensive should be charged more for their excess water use (over some benchmark) to ensure that the price mechanism reflects the true scarcity of water, and that market economics, with failing water markets, don’t allow the ongoing misuse of this valuable resource.
Tony Adams is a skilled financial markets professional with experience in investment management spanning over 30 years. He has a strong interest in sustainable investing and is currently a Master of Sustainability student at the University of Sydney.