Modelling urban water demand and trade

Research Project

Background

Water trading can be a useful tool for the allocation and management of water resources in Australia, especially in the Murray-Darling Basin. In the National Water Initiative, expanding water trade is sought to bring about ‘more profitable use of water and more cost effective and flexible recovery of water to achieve environmental outcomes’ (COAG 2004).

This study will investigate the likely economic impacts of expanding water trade to include urban-rural water trading. The study further develops the Commission’s capacity to model the economic impacts of changes in water policies and other impacts such as drought, and builds on earlier modelling of rural water trade in the southern-Murray Darling Basin which was completed in 2004.

Objectives of the Study

The study aims to investigate and report on the likely economic impacts of expanding trade in water to include urban-rural trade and in doing so assist policy making and help inform the community more generally about the impacts of alternative water policies.

The study will build and document a representation of urban water demand in the TERM-Water model to assess the possible impacts of urban-rural water trade. The model will be able to include estimates of the construction costs necessary to facilitate urban-rural water trade. Information given by the model will include estimates of the volume of rural-urban water trade, the impacts on rural and urban water prices/costs, and the impacts on gross regional product and industry outputs under various scenarios.

Research questions the Commission will use the model to provide insights on include:

• What would happen to rural water prices if urban-rural water trade were permitted given current and future water trading possibilities, under normal and drought conditions?
• What are the regional and sectoral consequences of current and future urban-rural water trade possibilities?
• What impact would urban-rural water trade have on urban water prices/costs as urban water demand increases over time?