The price is too low for H2O

Almost every day, a new solution to our water supply issues is proposed by our political leaders. We have been told that we need desalination plants, rainwater tanks, limits on watering our gardens, recycling facilities, grey water re-use, compulsory water efficiency tests on new homes.

Earlier last week, however, Malcolm Turnbull finally brought up the core issue: water is too cheap and we need to pay more for it. As in all markets, if the price signals are correct, individuals and companies become remarkably creative in finding the most efficient solution. The Federal Government can then stop dictating every specific water initiative, every technological solution and individuals' behaviour.

The central problem is that the existing price signals, largely set by state governments, are inadequate. Water is so cheap that there is almost no restraint on our demand and almost no incentive to be more efficient in our use of it. Consequently, when the supply of water drops as a result of lower rainfall, our consumption is not sufficiently curtailed and we have a crisis.

When was the last time you reduced the time you spend in the shower because you were worried about the water bill? You've probably never done it, as it only costs the grand sum of about 1c per extra minute. Watering your garden for an hour costs about 50c. And urban users are paying the big bucks: farmers, who consume 70 per cent of all water in Australia, pay much less. The price of what is supposedly our most precious resource is less than 0.001per cent of the price of milk or petrol.

An increase in the price of water would have an immediate effect. Just as people take electricity costs into consideration when they purchase or use a heater or an air-conditioner, a higher price for water would cause people to think more carefully when buying a new shower head, dishwasher or washing machine. It might even persuade people to think twice about the size of their lawn or the types of trees they plant.

Education campaigns have had some effect in this area, but they are not as powerful in changing behaviour as price signals. Witness the ongoing, largely ineffective campaign against the use of plastic bags. Yet when Bunnings introduced a 10c charge per bag, the number of plastic bags used dropped by 73 per cent in a year.

The behavioural changes likely to result from higher water prices cannot be underestimated. Of even greater importance, however, is the increased supply that would result once it became economically rational for companies to invest in supply schemes.

If water were more expensive, and if private suppliers could sell the water they create, there would be an automatic incentive to invest in increasing available supplies. An abundance of projects would quickly become viable: industry investing in water treatment, local recycling schemes, pipelines to move water between catchments and reduce losses, or schemes where treated waste water is injected into aquifers to provide a source for use during droughts. All this would happen without the Government dictating it.

Significantly, such investment is likely to provide sources of water that are less dependent on climatic events and offer greater reliability of supply. Furthermore, with profitability depending on good information, it would become worthwhile to collect more hydrologic information so that better investment decisions could be made by industry, irrigators and water agencies.

At the moment, prices are so low that these projects only happen if government is willing to fund particular initiatives. For companies or individuals, it is cheaper to simply use more existing stored water than to invest in these water-savings systems or recycling facilities. The recent focus on opening up the water market is a roundabout way of increasing the real cost of water but unless it provides incentives for investment, change will be incremental.

We need to tackle the issue of water pricing head on. A two to three-fold increase in price is probably required for a significant impact. This would clearly produce equity issues that would need to be addressed. But we cannot continue down the path where every incremental initiative is determined by government.

Turnbull is right when he says, "We can have as much water as we wish." But it requires that we take our medicine and pay more for our most precious resource.