A buck-per-tonne is too cheap for our most precious resource

With Australia now mostly in drought, and decades of under-investment in urban water infrastructure catching up with our big cities and growing regions, water is quite rightly a hotly debated topic. Plenty of solutions have been put forward to help alleviate the problems Australia’s cities are facing - some sensible and some not so good.

Water is a tricky resource: it’s sometimes abundant, sometimes not; it’s heavy, difficult and expensive to distribute; it’s necessary for the survival of natural and man-made environments. In this broad, sunburnt country of ours water is crucial.

Understandably, many farmers are short of the stuff and river systems are suffering across rural Australia. However, our big cities - which historical don’t have low rainfall compared to many other places - are all facing water crises.

There are many options available on the supply side for fixing the urban water crisis: recycling, desalination, new dams. These are certainly now needed in many places, and decades of under-investment in infrastructure needs to be hurriedly rectified. However, demand management has been bungled.

To date, demand management of water has involved restrictions. Recently, the level of restrictions was raised in Melbourne and Brisbane, and Sydney is likely to follow after the New South Wales state election in March. However, restrictions mostly target the use of water outdoors, distort individual behaviour and, according to recent media reports, can cause hostilities between neighbours.

Furthermore, the effectiveness of restrictions is undermined by three key factors. First, around two-thirds of household water use occurs indoors, where policing by water inspectors is hard. Second, restrictions can’t last forever, as they’re not politically sustainable for an indefinite amount of time. And third, water is essentially costless for many people.

Is beating households with a stick to do the right thing and use less water the right way to approach the issue? Is goodwill the solution to excess water use?

There’s a good case for long-term restraint in water use: treating this resource as the precious commodity that it is will ensure there’s enough to go around, and that lifestyles don’t continue down environmentally unsustainable paths. How else, then, can water use in cities be reduced?

Economics has a neat, efficient, tried-and-tested answer: price.

As noted, water is essentially costless in Australian cities. Households use about two thirds of urban water. Although average household water consumption has fallen recently, it was still 225 kilolitres per year in 2004-05. Almost everywhere it’s charged with a tiered tariff. There’s a low rate - around 82 cents per kilolitre in Melbourne or $1.26/KL in Sydney - for a reasonable amount of water each day (usually up to one kilolitre, depending on the city). Anything extra is then charged at a higher rate: $1.42/KL in Melbourne or $1.63/KL in Sydney.

The rates for Brisbane, Adelaide and Perth are even cheaper, but follow a similar structure. Commercial rates are usually the same as those for households, or a bit cheaper. On average, urban tap water in Australia is charged at $1 per kilolitre. That’s one-buck-per-tonne of water.

Quite simply, this is too cheap. However, raising the price is an effective way to curtail demand. To date, cutting back on excessive water use (restrictions) only has an economic incentive for households and businesses insofar as not being caught out and fined. Scare economics is not smart economics.