Save not Trade
Creating tradeable water allocations for urban communities has been promoted as an alternative to water restrictions. The idea has theoretical merit but it would be difficult for urban household users to accept and operate. It is unlikely to lead to investment in water infrastructure because it does not solve the underlying problem of a single natural monopoly urban water supplier. It will solve the problem of urban water restrictions by rationing on price and it may be appropriate for large commercial users and irrigators who have genuine alternatives and a commercial reason for using water but for most urban water users water is a relatively low expenditure and for most uses it is price inelastic.
Urban users do not want to become urban water traders. They do not want to go to the effort of trying to work out their consumption of water and they do not want to have to pay large amounts of extra money for water they have already consumed. They want certainty over the availability of water and the price of the water and they do not want water restrictions. Urban water users do not use water for profit making activities. There is no price/benefit equation and the price required to cause someone to reduce the number of times they will flush the toilet is many times the current cost of one or two cents.
Already in cities like Canberra consumers pay on average $1.65 per kilolitre for water which is above the cost of supply obtained through increasing the storage capacity of existing dams – or in coastal cities the cost of desalination.
The price of water is already high enough to pay the marginal cost of increasing water supply. As this is the case we have to ask the question on why we have water restrictions? Increasing the price of water through trading schemes may replace water restrictions by edict with water restrictions by price but it will not solve the problem of increasing the supply. If increased supply was only dependant on price then it would have happened already. If this is true then Water Trading is unlikely to increase supply and is likely to make the situation worse.
A likely scenario is for monopoly water suppliers to decrease supply below the sustainability level so as to increase scarcity and so increase the cost. The monopoly supplier will then release some water to meet the demand at the higher rate. This is what has happened with existing urban water supplies where the monopoly supplier has taken large profits, not increased supply and has restricted consumption when there is a drought by water restrictions. Allowing the monopoly supply to increase prices as the rationing mechanism is almost guaranteeing that prices will increase and that supply will continue to be limited. The monopoly supplier will not only not increase supply but continue to restrict other organisations increasing supply water through such ideas as storm water harvesting.
The temptation to increase the financial yield by limiting the supply of water in times of plenty as well as times of scarcity will be very difficult for governments of all persuasion to resist.