Supply and Demand for Water Use by New Forest Plantations: A Market to Balance Increasing Upstream Water Use with Downstream Community, Industry and Environmental Use?
NSW Department of Primary Industries Economic Research Report No. 43
58 Pages Posted: 25 Sep 2012 Last revised: 21 Sep 2014
Date Written: 2009
This study examines the use of water by existing downstream entitlement holders and their possible market interactions with upstream interests in new forestry plantations in the case of the Macquarie River Catchment, NSW. Demand for offset water to allow upstream plantation establishment is estimated as a function of tree product value and direct and opportunity costs in six sub-catchment areas with different rainfalls and locations with respect to urban and other high security water users (UHS). This upstream demand is aggregated with downstream demand for water. The aggregate supply of downstream water entitlements is posited in terms of marginal values to each of three sectors [stock & domestic (S&D), irrigation (IRR), and wetland (WL) areas] and their current entitlements. Assuming a fixed quantity of water entitlements, equilibrium quantities traded and the distributions of trade and associated surpluses are estimated given each of four stumpage values for tree products. This is done assuming four combinations of scenarios: with or without the policy that water entitlements must be obtained before establishing a tree plantation, and with or without one sub-catchment being very salty, the latter being a hypothetical case. Assuming $70/m3 stumpage value for tree products, without the requirement to purchase offset water, total upstream surpluses due to extensive tree planting are projected to reach $639M and $688M in the FRESH and SALTY cases, respectively; downstream losses, not counting damages to the wetlands, are $233M and $236M (summing the IRR and S&D sectors) given uncompensated losses of 137 and 138 GL of water flow to them; further, uncompensated losses of 154 and 156 GL in annual river flow would be suffered by the wetlands. With the requirement to purchase water for establishing new tree plantations, upstream surpluses are projected to be $192M and $220M in the FRESH and SALTY cases, respectively, while downstream sums of IRR and S&D surpluses are $138M and $151M, given 90 and 97 GL of water traded upstream with no damages to the wetlands. Greater surpluses in the hypothetical SALTY cases are due to subsidies paid by UHS for tree planting to reduce water yields from the very salty sub-catchment, thereby lowering river salinity to acceptable levels for domestic use. Although sale of downstream water entitlements may just balance reductions in river flow due to new tree plantations, water delivery efficiency may be reduced and overhead costs increased for those not selling entitlements. Our analysis has not counted these costs.
Keywords: water, entitlement, supply, demand, economics, forest, evapo-transpiration, salinity, urban, irrigation, wetlands, environmental services
JEL Classification: Q150, Q180
Suggested Citation: Suggested Citation