Irrigation Externalities: Pricing and Charges

Abstract

The paper discusses the nature and causes of environmental change related to rural water use, and provides a taxonomy of the many diverse types. It also examines the issues surrounding possible charges on water use for water related externalities. There have been few attempts by water utilities to incorporate externalities into full cost pricing of irrigation water. The aim of this Staff Working Paper was to: examine the extent to which charges imposed by irrigation water utilities could address externalities from irrigation water supply and use; and to develop a framework to identify and characterise changes in environmental conditions from the supply and use of irrigation water that may lead to environmental externalities.

The authors found that many factors influence the extent to which charging for water would change water use. These include the volume of water available to irrigators, the extent to which trade can occur, the size of the charge or tax, the price responsiveness for irrigation water and the existing mechanisms to address externalities. A tax on water use may increase economic efficiency where external costs are related only to the level of water use. However, such a tax is an unsuitable instrument if the Government's policy objective is to reduce environmental damage to a predetermined level or to raise a target level of revenue to address the externalities.

The views expressed in this paper are those of the staff involved and do not necessarily reflect those of the Productivity Commission.

Keywords: Australia, Agriculture, Environment, Externalities, Irrigation, Pigouvian taxes, Regulation, Rural water, Water, Water markets, Water supply

JEL Classification: Q