Gerry Eckhoff: Opportunity cost of Water

A report by Global Water Resources Group projects that by 2030, annual global fresh water needs will reach 6.9 trillion cubic metres – 64% more than currently existing reliable supply. The implications for further global and domestic conflict are obvious as interest groups vie for influence and control. 

In NZ, evidence suggests that variation of rainfall from year to year and not scarcity of water is the real problem. Despite this obvious reality being easily overcome by water storage - nothing is now to be done - by Government decree.  The Labour led collective (Government) decided to do away with the ineptly named “irrigation fund” in favour of other expenditure. There will be a massive future cost associated with that decision. Economists call it the opportunity cost – in this case - of fresh water. 

Just the other day it was announced that the vegetable growers of Levin will not be planting as the weather is too hot and they have no stored water to irrigate their crops. Surface takes from rivers are banned as minimum low flows of rivers are implemented by Regional councils. The decision not to invest in water storage will therefore result in a significant opportunity cost through loss of income to the grower.  Consumers are also impacted by a likely higher cost of vegetables. We consumers are constantly impacted by opportunity cost as we make our usual decisions when buying and selling. To buy or not buy a car; to invest some money instead of going for a holiday. All have an opportunity cost attached. The choices we the people make may have only minor impacts but what happens when Governments simply ignore this most basic of economic principles in favour of political expediency?

The environmental lobbies campaign to demonize all forms of intensive farming has been entirely successful to the extent that the Government withdrew even the meagre support of the previous Government - for water storage.  This occurred despite the reality that 98% of all water in NZ is not used for intensive farming.

 The lack of storage nationwide is already impacting on town water supplies as population growth and hot dry summers start to impact. Central Governments appears preoccupied with the infrastructural problems of Auckland which are real but so too is inadequate water storage capacity throughout NZ. 

The so called “Irrigation fund” is or was a public good fund where recreational, cultural, aesthetic, economic, social and biological values all benefit from increased supply of fresh water.

The administration of water by councils is under increasing pressure to determine and balance all the competing values of fresh water. Each has significant losses attached to the other’s values. Fresh water allocation between competing productive economic uses is relatively simple compared to allocation for recreational values - competing for the same water.  In other words -as demand for recreational value increases, the availability of water for an economic use diminishes. Add in the seasonal variation of rainfall, and the failure to apply even basic economics to the use of water, the opportunity cost becomes even more obvious.

The question now becomes - who or what should have the highest use right to existing water? The productive use or the recreational use? The environmental lobby groups have a huge political and public sphere of influence, so the answer becomes self-evident. Meanwhile the opportunity cost of water - for all our benefits -  is still ignored.

The decision soon to be made by the Otago Regional Council on the minimum flow of the Clutha River is a case in point. The ORC is asking people to make submissions on the nebulous concept of how they “feel” about the Clutha River. No empirical evidence as to the financial / productive /economic / recreational / social value of the Clutha is released by the ORC to assist the public in their personal submission. In other words, the opportunity cost of the water from the Clutha is set aside from the process in favour of how we all feel about this magnificent water body. The visual impact of the Clutha is clearly substantial yet only a relatively small (but increasing) percentage of the population enjoy its recreational potential. It is not clear how under-utilization of this completely renewable resource benefits the wider community of Otago or NZ. The opportunity cost of this resource must be fully assessed and debated before any decisions can be rationally made but which (regrettably) will not happen.

To the productive sector (which includes all towns) the cost of supply and distribution of water is very real and is inherent in the cost of supply and production. To the fisher or recreational user there is no cost except the opportunity cost to our wider society, of which they are part. Every use of fresh water therefore has a cost; however, some costs are imposed - others aren’t - often due to political influence rather than hydrology or economics.  The electricity industry, for example, pays little cost for the millions of tons of silt deposited behind the Clyde and Roxburgh dams yet provides an essential service to us all - as do food producers. Only one industry however is vilified. Even viticulturists are called alcohol farmers by some environmentalists.

The issue of the export of virtual water is another issue for another time.

The failure of our Government to understand the opportunity cost of water will impact on us all. Prime Minister Ardern needs to tell us of her plan -  before the wells run dry.

Gerry Eckhoff is a former councillor on the Otago Regional Council and MP.