Economics: Leading gifted horses to water: the economics of climate adaptation in government-sponsored irrigation in Victoria
Synthesis and Integrative Research Program
Abstract from final report:
The aim of this research was to understand how gifted infrastructure provided to irrigation corporations in northern Victoria impacts on farmer adaptation and to assist in designing incentives that would ensure farmers continued to adapt to changing water availability. Whilst there is ample evidence that farmers adjust in response to short-term climatic conditions, like drought (see, NWC 2012), the public provision of upgraded irrigation infrastructure means that farmers could be misguided about the true cost of increasing water scarcity, especially over the longer term.
A critical component of the existing tariff structure relates to the ability of farmers to understand the drivers of higher or lower water charges and any relationship to water availability and then respond accordingly. Without knowledge of the link between resource availability and the total cost of accessing and using water, farmers come to rely on heuristics that potentially limit adjustment to alternative production technologies.
A second critical element of the nexus between gifted assets, tariffs and adaptation hinges on termination fees, applied when an irrigator chooses to exit the industry or reduce the size of their irrigation enterprise. Termination fees relate to the ongoing legacy costs of infrastructure and, while potentially legitimate on pecuniary grounds, stand to severely impede industry adjustment. Termination fees are established as a multiple of selected components of the water tariff so these components and their monetary value can significantly impact on the willingness of irrigators to adjust the scale of their enterprise over the longer term. Excessive termination charges constrain the capacity of farming businesses to progressively contract, should water become increasingly scarce and/or less reliable.
This study was premised on the view that greater understanding of the preferences of farmers, as they relate to tariffs, could guide a tariff reform process that would in turn result in enhanced adaptation. This required information about what aspects of tariffs could be adjusted and willingly accepted by farmers. Two approaches were used with a technique known as Best-Worst Scaling delivering the best results.
The Best-Worst Scaling data assembled from this project highlights the aspects of tariff reform that can be undertaken with least resistance from farming communities. The main findings from the empirical work are that farmers would heavily favour tariffs that:
- Were more easily understood;
- Embodied lower termination charges, and;
- Allowed for staged payment of water charges.
This information has already been taken up by the bulk water supplier in northern Victoria (Goulburn-Murray Water) with the supplier now undertaking a major reconfiguration of tariffs for farmers in the region.
The project also sheds light on the potential for sending mixed messages about adaptation when water buyback is undertaken simultaneously with infrastructure upgrades. This adds weight to the call for adjusting tariffs to at least provide some incentives for adaptation behaviour and the requirement to limit the perception of being penalised for opting to reduce the extent of irrigation or leaving an industry. Whilst we acknowledge that tariff reform and clearer price signals are only one component of improving the adaptation by irrigation farmers, we recommend that any future gifting of irrigation infrastructure should be attended by a requirement on the part of irrigation companies to simultaneously reform tariffs. Material reductions in termination charges should be part of these reforms to ensure that mixed messages do not unduly slow farmer adaptation.
- 1 of 10
- next ›