Tuesday, 15 August 2017

Labour's water policy

Previously on this blog, I used the Greens policy proposal of a 10c/litre royalty on water bottlers as an excuse to witter on about how water is currently managed and describe some of the relevant economics.

Labour has now released its water policy, headlined "clean rivers for future generations". It talks about the need for "more sophisticated farming methods that rely less on ever higher stocking levels and are more focused on value-add". I strongly support these objectives.

The bit attracting most attention though is that "a royalty on commercial consumption of water will assist with the cost of keeping our water clean". Farmers are grumpy, as you can imagine. One Canterbury dairy farmer estimated that at 1c/cubic metre, his water royalty for the year would be $26,000. To put that in perspective, he is currently paying $90,000 per annum for the electricity to pump his irrigation water.

Anyway, as a farmer and an economist, I'm also a bit grumpy. Not because I object to water royalties as such, but because I think the proposed policy, as it affects agriculture, misses the mark in an important way.

A future Labour-led government would want to spend public money cleaning up waterways, and there is a logic in raising the funds for that clean-up from polluters. However cleaning-up is not a long-term solution if the polluters continue their current behaviour, and the policy is clear that it seeks different (more sophisticated) farming methods.

If we want to change farmer behaviour, new environmental taxes on farming should be designed to be (more or less) equal to the cost farmers impose on society as a whole. This is known as a Pigouvian tax. It'd be extremely difficult to argue against taxes set on this basis, because they are simply telling farmers: pay your own bills. Notice that Labour is already almost selling its policy on this basis ("assist with the cost of keeping water clean").

My concern is that water royalties are a poor proxy for the environmental cost of intensive farming (including horticulture, cropping, orchards etc). Dairying is a huge water user but that doesn't really matter in places where there is plenty of water. Nitrates are the main problem with intensive dairying, so that is what should be taxed.

Some examples might help understand this point.

  • In our area, we are blessed with pretty decent rainfall (too much right now!) so irrigation is used far less than in Canterbury. Many of our neighbours are serious urea addicts though, because that's how high stocking rates & production are maintained in the standard dairying model. 
  • Wine growers in Marlborough have very modest water needs compared with dairying. Pesticides and fertilisers used by wine growers are having a serious impact on the health of local waterways.

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