The economics of options for managing groundwater in Perth’s Gnangara area

The Issue

The Gnangara groundwater system just north of Perth has come under increasing stress over the last 40 years or so as Perth’s annual rainfall has progressively declined due to climate change. The amount of groundwater abstracted has increased significantly over this time to meet the needs of Perth’s growing population.

Falling groundwater levels are having adverse environmental impacts and have begun to reduce the quality of water for consumptive users (including Perth’s water supply, irrigated agriculture, irrigation of public open space, private domestic garden bores, and other users).

Subarea allocation limits have been, or are in the process of being, capped, which has meant licensees have only been able to increase their groundwater allocations by trading with existing licensees, and no ‘new’ water is available.  However, the existence of unused allocations (so-called ‘sleeper’ licences), may cause groundwater use to increase over time unless these allocations are recouped.

Another risk to the system is the continuing growth in domestic garden bores, which don’t require a groundwater licence. And as Perth’s urban development footprint pushes further north, the Water Corporation is expected to seek access to additional groundwater to meet demand for public supply in these areas.

The Solution

In order to restore abstraction to a sustainable level and address threats to groundwater dependent ecosystems, DWER has identified four management options. The options differ from one another on the basis of the volume of enforced reductions in water abstraction, the degree to which the reductions are targeted to particular type of water users, and/or targeted to particular subareas.

Hydrological modelling by DWER indicates that some options are likely to be more effective than others at preventing future losses in water availability due to declining quality. For example, ‘moderate’ intervention options are only able to avoid a portion of future loss, while more intrusive interventions are able to prevent future losses, but only at a higher up-front cost to water users through deeper licence cuts.

Synergies developed a CBA model that compared the net present value of these impacts across the four options. A number of methods were used for valuing the impacts:

• Economic impacts to public water supply were measured using Water Corporation’s estimate of the cost of developing an alternative water source(s) for public water supply in the event that its groundwater licence is reduced.
• The economic impacts of changes in water availability for agricultural users (either through licence reductions in the case of the intervention options or through natural reductions in water quality under Base Case) were assessed through farm budget analysis in consultation with growers and agricultural consultants.
• The loss of public amenity due to reductions in the area of POS that can be kept green over summer were valued through a community Choice Modelling survey.
• The economic impact of tighter restrictions on domestic bore owners was evaluated by drawing on previous studies (i.e. Benefit Transfer) that have estimated household willingness to pay to avoid water restrictions. Further, to the extent that bore owners are forced to abandon their bores due to declining water quality, we value this by assuming these users substitute to more expensive scheme water.
• Benefit Transfer was used to value environmental impacts (benefits and costs). The source values used in this evaluation were all generated through previous Choice Modelling studies of Australian households

The Results

The monetised environmental benefits from addressing over-allocation in the Gnangara Groundwater Area are significant. However, environmental gains associated with the more ‘aggressive’ options are outweighed by the higher costs imposed on water users when assessed in NPV terms, which allows for time lags between intervention and the timing of future environmental gains. That is, net benefits diminish with progressively greater levels of intervention.

Two of the four options yield net positive benefits, and these options correspond to ‘moderate’ interventions. The more aggressive options give rise to costs that exceed benefits (ie. a negative NPV).

Conclusion

This study provided an important contribution to understanding the economics of alternative management options in Gnangara and the magnitude of trade offs involved. It is difficult to make informed policy decisions that are in the public interest without having an objective framework within which to compare options.

DWER is using the results of the study to inform the new Gnangara groundwater allocation plan, which is due to be released for public comment at the end of 2019.