Environmental Values and Water Policy

The emergence of water markets has heralded the prospect of increased efficiency in the use of the resource for extractive purposes such as irrigated agriculture. The separation of water title from land title has allowed trades from lower to higher values uses of water and higher water prices have increased interest in the use of capital as a substitute for water volume. However, water markets have not encompassed all elements of demand for the resource. Notably, demands for the environmental public goods provided by river flows have not been revealed in markets. To fill this void, State Governments have instituted regulations requiring ‘environmental flows’ to be quarantined from the market allocation process. This policy has triggered negative responses from irrigators who have been able to extract less water (or fear that they will) and from conservationists who argue that the environmental flows are insufficient to create healthy river ecosystems. Lobby groups have found that the process of determining environmental flows is a prospective site for rent seeking. To avoid policy being driven by rent seeking, information on the costs and benefits of environmental flows is required. Whilst the costs of environmental flows are readily assessed through reference to market data on irrigators’ surpluses foregone, the benefits must be estimated through the use of non-market, stated preference valuation techniques. These techniques – including contingent valuation and choice modelling – remain controversial both inside and outside the economics profession. Some argue that they should not be used on ethical grounds. Others argue that they cannot be used on technical grounds. These arguments are discussed in this paper, using the context of the water policy debate. The evidence is that stated preference techniques are being used, and applications have been performed in Australia in the context of riverine health. However their use remains restricted relative to the scale of the Australian natural resource management task. Some possible explanations for this limited uptake are provided along with some suggested ways forward.