Trading water

While European cities may have finished sweating it out after a long hot summer, spare a thought for those on the other side of the world facing up to yet another summer without rain.

With many reservoirs at their lowest recorded levels and almost all Australia’s major cities now imposing some form of restrictions on water usage at the domestic level, Australians are being forced to take a fresh look at the impact – and cost – of water in their lives.

Although water is a concern for Australia right now, climate change is likely to make it an issue for many other countries in the years ahead.

Estimates by the United Nations suggest that, by 2025, some 1.8bn people will be struggling to make a living in regions afflicted by “absolute water scarcity”.

As Organisation for Economic Co-operation and Development (OECD) deputy secretary-general Kiyo Akasaka noted recently, most of the Middle East and North Africa already falls into this category. Rising populations and growing industrial production and consumption in emerging countries will further lengthen the list.

And the implications of water scarcity can be truly frightening.

The OECD’s 2005 Issues Brief: Water and Violent Conflict noted: “Access to water and water allocation and use can become the focus of tensions, which may potentially spill over into conflict, within or between states.”

In March, the UN Environmental Programme’s Global International Waters Assessment (GIWA) report claimed freshwater shortages were “likely to trigger increased environmental damage over the next 15 years”, with farming highlighted as the biggest threat to freshwater supplies.

“Globally, there has been an increased demand for agricultural products and a trend towards more water-intensive food such as meat rather than vegetables, and fruits rather than cereals,” the study noted.

None of this is news in Australia, where water has become a major issue due to both the ongoing drought and the country’s status as the world’s driest inhabited continent.

Despite a natural shortage of water, irrigated agriculture plays a key role in the nation’s economy, providing 50% of agricultural profits.

Climate change is having a significant effect in Australia, with the impact on rainfall predicted to be increasingly severe. Government figures indicate that over the last 25 years rainfall runoff into the catchment for the city of Perth has been 40% less than the mean over the last century, with similar trends apparent along the east coast.

Demand is currently projected to exceed supply from existing water sources in nearly all major Australian cities within 20 years, with limited opportunities existing for new dams to be built.

While there is growing urban and rural demand for water, environmental concerns about the health of rivers and wetlands are also increasing.

Australia is rapidly discovering water is not just an economic issue but also a hot political one.

Restrictions

Concern about water supplies has seen the imposition of increasingly strict restrictions, and governments are encouraging communities to rethink their usage at the domestic level.

Sensitivity about water and the environment means it has been almost a quarter of a century since a new dam was built for any of the large cities in Australia, but maintenance of water supplies to rapidly growing urban areas is starting to bite politically.

Water and healthcare were the two top issues in the recent Queensland state election, with the Queensland Premier, Peter Beattie, outlining a A$1.3bn plan to drought-proof regional areas with a series of pipelines and dams. Several tough battles were fought in electorates where new dams are now on the drawing-board to meet the needs of rapid population growth in south-east Queensland.

Adding recycled water to the drinking supply has also proved to be very contentious. Residents of Toowoomba in southern Queensland recently voted against a proposal to recycle drinking water for the city, despite a critical water shortage.

The vote was seen as a litmus test of community attitudes across Australia towards recycled drinking water and, as a result, politicians have shelved plans to implement the strategy.

But with reservoir levels for major cities like Sydney hovering around 40% of capacity, something has to give, and it is likely to be the cost of water. Experts argue that water in Australia – as in most countries – is massively underpriced.

A new study by Monash University and the Government’s key scientific body, the Commonwealth Scientific and Industrial Research Organisation (CSIRO), suggests that in the decades ahead the price of water could jump to six times its present level in Sydney and Melbourne.

Adding to the complexity, the management of Australia’s water systems has traditionally been in the hands of state governments, and the politics of moving to a national focus is proving tricky.

As the federal parliamentary secretary for water, Malcolm Turnbull, noted recently: “This is a delicate issue, there’s a lot of politics in it.” He is arguing for a more nationally co-ordinated approach to water issues.

“We shouldn’t allow lines on a map, whether they be a state border or whether they be a local government boundary, to be an… impermeable barrier, if you like, for the movement of water,” Turnbull said.

Water has become so important that governments at both the state and federal level have agreed on a national blueprint for water reform, the National Water Initiative (NWI). This plan is designed to ensure Australia’s water resources are used in such a way as to give security of tenure to water users and to restore the environmental health of stressed river systems.

A key part of the NWI’s work is promoting the efficient operation of water markets to encourage water trading.

Internationally, Australia is one of the leaders in water trading, with users already starting to trade water allocations via the internet. Using the market to improve the efficiency of water allocation is rare, as most countries – particularly in the developing world – are still tied to traditional government allocation systems.

A 2003 paper prepared for the Government’s Water Reform Working Group noted: “Australia appears to be as advanced as any other country in relation to most aspects of water markets”, and recent initiatives have further improved the situation.

South Australia kicked off the first state-based permanent water trading system in 1983, when it created a system for separating water-access entitlements from land title.

While water trading is still mostly at the level of the individual farmer and irrigation authority, urban water authorities are starting to look at buying water in rural areas to supplement diminishing city supplies.

Derivatives such as futures and options over water allocations are also being developed.

Assessment

The NWI is undertaking a baseline assessment of Australia’s water resources to help improve resource management. At present, the measurement of Australia’s household and water assets is incomplete and there are only limited data on environmental water flows.

This situation was identified in the GIWA study as being a common problem, with the report noting that few nations had adequate scientific or technical information about their water supplies. It said that most were “operating in the dark on the size of their water resource, and the precise patterns of supply and demand”.

Another significant project for the NWI is the establishment of a nationally consistent water accounting system. This will include national guidelines and principles for both environmental and open-water accounting and reporting.

Against this reform backdrop, there are growing calls for the economic importance of water to be more carefully balanced against the requirements of the environment.

This has encouraged state governments to take action. For example, the New South Wales Government has begun buying back water from licence-holders to replenish supplies to some of the state’s wetlands.

There is also increasing pressure on the agricultural sector, with demands for greater water efficiency in on-farm practices to improve environmental flows.

Given current trends, Australia is facing an enormous bill for investment in water infrastructure over the next few decades.

As Turnbull notes: “All of our major centres will have to embrace large-scale recycling of wastewater and cities with relatively low rainfall (like Perth) will also embrace desalination, especially if climate change continues to produce reduced stream flow into catchments.”

Given all these competing demands, Australia’s problems over water are unlikely to disappear any time soon.

Janine Mace is an Australian freelance finance and business journalist.