The economics of water in a growing population

Adam Smith knew a lot about life and economics but water puzzled him. How could water be so much cheaper than diamonds? Nobody can survive without water, but we could probably eke a life without diamonds.

What confused Smith still confounds us. Three-quarters of our blue planet is covered with water, but we are yet to price, supply and use it efficiently. This is certainly true for Australia with its fast growing population.

The Treasury’s 2010 Intergenerational Report projects that Australia’s population will increase by 63 per cent to 35.9 million people by 2050. As 85 per cent of our population is urban, we can expect most of this growth to occur in cities. The Water Services Association Australia (WSAA) predicts that by 2056, urban water demand will increase by 76 per cent. So when policymakers plan for our future water provision, usage and costs, the focus should be on cities rather than the agricultural and rural sectors.

Households represent only 13% of total consumption and agriculture 50 per cent. Nevertheless, prominent demographer Bob Birrell believes our cities will have to be ‘completely redesigned’ to cope with a growing demand for water. But the reality of population growth does not warrant a drastic overhaul of water and urban infrastructure.

With the lowest average annual rainfall of all continents (excluding Antarctica), Australians have always had to plan for a reliable water supply. However, we are currently drawing upon less than 10 per cent of our fresh water resources. This means 19,700 kilolitres of water is available per person per year – well above the global median of 4,300 kilolitres.

The water challenge in Australia is not the amount of rainfall but its extreme variability.

Variability of rainfall is not just seasonal but annual. The El Niño dry period ended recently and we are in now in the La Niña wet period. Long-term water planning can ensure a reliable water supply across these dry/wet variations. But after a decade of drought, policymakers are reluctant to abandon their dam-based mentality.

In the past, dams were built to secure a reliable source of water and for extensive storage. The last major period of dam building ended in 1990, but building new dams features prominently in the population debate. However, almost every river in Australia has been dammed at least once, and the best sites with high rainfall have already been taken. Though new dams should not be ruled out as an option, we should also look to new sources of water supply, technology, and pricing options.

As nearly all our capital cities are coastal, desalination can potentially provide a significant portion of our urban water requirements in the near future.

Currently, desalination plants supply 0.3 per cent of overall drinking water. The WSAA predicts that the total capacity of the eventual six desalination plants in capital cities (Sydney, Melbourne, Southeast Queensland, Perth and Adelaide) will be able to meet the forecast additional water demand until 2026.

Recycling more water can add millions of litres to our urban water supply. With better technology, water reuse per person nationwide has significantly increased from 7 kilolitres in the 1990s to 21 kilolitres in 2004–05. However, in the last five years, the proportion of recycled water in total water supply has remained unchanged at 4 per cent.

Although water desalination and recycling are energy intensive and expensive options, they do not depend on our highly variable rainfall, and can easily supplement dams to supply water for a growing population.

A variable (scarcity) pricing mechanism can help regulate supply for the times when dam levels drop again.

By setting higher prices when dam levels are low, and lower prices when dam levels are high, a constant water supply can be provided. Instead of rationing out remaining dam water through strict restrictions or permanently high prices, the temporary higher prices would allow desalination plants to provide additional water as required.

To implement such a pricing mechanism, we need comprehensive urban metering. According to the OECD, Australia metered 84 per cent of single dwellings in 2008. Sweden, France and the Czech Republic meter 100 per cent of dwellings. While metering of individual apartments is more cumbersome than stand-alone houses, increased metering would mean water prices account for the total services delivered.

Water-efficient appliances are also playing an increasingly important role in saving water.

From shower heads and dual toilet flushes to leak detectors and almost waterless washing machines, households new and old can use less water, thus reducing the pressure on existing water infrastructure while population grows. Through demand management programs, leak reduction, and increased water recycling, Sydney has kept its water use at 1970s levels although its population has increased by 1.3 million.

The ancient problem of how to correctly supply and price water remains with us today. But these are problems that can be solved with ingenuity, innovation and ideas.

Rebecca Gill is a Researcher at The Centre for Independent Studies. Her report Water Provision for a Growing Australia was released by the CIS.