Upstream demand for water use by new tree plantations imposes externalities on downstream irrigated agriculture and wetlands

Abstract

Large-scale tree plantations in high rainfall upstream areas can reduce fresh water inflows to river systems, thereby imposing external costs on downstream irrigation, stock and domestic water users and wetland interests. We take the novel approach of expressing all benefits and costs of establishing plantations in terms of $ per gigalitre (GL) of water removed annually from river flows, setting upstream demands on the same basis as downstream demands. For the Macquarie Valley, a New South Wales sub-catchment of Australia's Murray-Darling Basin, we project changes in land and water use and changes in economic surpluses under two policy settings: without and with a policy requiring permanent water entitlements to be purchased from downstream parties, before plantation establishment. Without the policy, and given a high stumpage value for trees ($70/m3), upstream gains in economic surplus projected from expanding plantations are $639million; balanced against $233million in economic losses by downstream irrigators and stock and domestic water users for a net gain of $406 million, but 345GL lower mean annual environmental flows. With the policy, smaller gains in upstream economic surplus from trees ($192million), added to net downstream gains ($138million) from sale of water, result in gains of $330million with no reduction in environmental flows. Sustaining the 345 GL flow for a $76 million (406-330) reduction in gains to economic surplus may be seen to cost only $0.22 million/GL; but this is much lower than the market value of the first units of that water to agriculture and forestry. © 2012 The Authors. AJARE © 2012 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Asia Pty Ltd.