Five reasons to put a price on water

In recent days both Environment Minister Nick Smith and Prime Minister John Key have spoken extensively about fresh water. They continue to claim that nobody owns water and that therefore commercial operators should not pay to use it. Regardless of ownership rights, here are five reasons why we think it makes sense to put a price on fresh water.

 1. A return to the Average Jo and Joe

According to Mr Key, charging for water would just be a "revenue grab." And what exactly is wrong with that? The majority of Kiwis pay plenty of tax thanks very much, so getting some more revenue from elsewhere could help usher in the government’s much hoped for tax cuts.

Mr Keyargues that companies that use water create jobs and profits, so we shouldn’t tax them any further. But water is an input to a business like any other, so why shouldn’t the business pay for that input? At the moment, we are giving away a valuable input, so the true value of water shows up elsewhere. The value of water consents becomes capitalised in land values – irrigation increases a farm value by $8000 a hectare for example – which become a tax-free capital gain to the owner. That isn’t fair for the average Kiwi.

Fresh water is a public resource. If some are gaining profit from it then quite simply they should make a contribution to the public purse.

2. Revenue for clean up 

Successive governments have poured well over $400 million into cleaning up our fresh water. This has all come from the taxpayer’s pocket – not from the people who actually caused the problem. Water users are a major cause of our fresh water quality problems. Dams slow the flow of water, leading to the buildup of algae. Factories discharge into fresh water. Intensive farming removes water from rivers and lakes and leaches nutrients – all leading to an increase in the concentration of pollution.

Water users should help pay for the clean up of our fresh water, as they have contributed to the problem.

Nick Smith says charging water users would be too complex – yet he is already working out a system for cost recovery. Why not add on a charge for cleanup costs?

3. Encourage efficiency of water use

Our politicians are supposed to be champions of the free market, and yet they overlook the very benefits that a market can bring. One of the reasons to put a price on any resource is to ensure it doesn’t get wasted.

Mr Smith argues  New Zealanders use about 2% of the fresh water resource, so there is no scarcity and no need for a price.This is blatantly wrong, for several reasons.

First, he is overlooking the impact of the hydro dams – when these are included we use up to 10% of our water flow. Secondly, there are many parts of the country that struggle to get enough fresh water when they need it, so there is scarcity. Finally, and most importantly, water that reaches the sea is not a waste, it is a river. Our rivers and lakes bring the public and the environment many benefits, and when big businesses use them in any way they inevitably damage them, and we all lose out. We should be compensated for that damage.

We’ve all seen farmers irrigating in the middle of a summer’s day, even when there are hosepipe bans in towns. Their profligacy with water makes a mockery of the public’s efforts to conserve fresh water.

4. Ensure water is used in the best possible way. 

Placing a charge on water will help ensure it goes to the best possible use.

Of course the community rights for drinking water and ensuring sufficient flow to maintain the environmental values – however the local community defines that – needs to be sacrosanct. Above that, if water is going to be taken and used, we want it to provide the greatest possible economic benefit to the country.

A charge will help this as it will encourage low-value users to trade with those who can use the water in higher-value ways. This helps with innovation and building new companies. At the moment, the first-in, first-served model means water ends up in the hands of those who ask for it first, rather than those who can use it best.

The government is trying to overcome this problem by allowing trading. However, that opens another can of worms – now we are allowing people to profit by trading water rights they got for free but nobody owns it? Allowing water to be traded is a good thing but it shows up the even greater need for a charge on water consents.

The ultimate answer here is a completely different way of allocating water use – by auction. As consents come up for renewal, we should auction those rights to the highest bidder. All money would be shared between regional councils and central government.

Should water from the Waikato be used to grow crops in the Waikato region, or be pumped to an ever-expanding resource hungry Auckland? If we charged for water or even better auctioned it, then we would know what the best use of water is. At the very least the people of the Waikato should be compensated for the loss of this precious resource across the Bombay Hills?

5. Put a price on pollution too

Nick Smith was right to point out that water use is not the big problem coming – it is water pollution. However, the government’s record here is no better. All it has  achieved thus far is to legalise the pollution farmers are already doing, and done nothing to reduce it. In fact, all its efforts have gone into increasing it, through subsidising irrigation.

Ultimately, we need to price pollution too. Any nutrient loss by farmers – above an agreed buffer to cover off the uncertainty of measurement – should be charged for. Only then will farmers and other landowners have an incentive to reduce pollution.

Geoff Simmons is an economist working for the Morgan Foundation. This post first appeared on Gareth's World.

Tune into NBR Radio’s Sunday Business with Andrew Patterson on Sunday morning, for analysis and feature-length interviews.