Sustainable diversion limits and climate change: results from an integrated economic – hydrology model of the Murray-Darling Basin

Climate change and the proposed Murray-Darling Basin Plan both result in less water for irrigation. Climate change is projected to take water from all uses including the environment, whereas the likely sustainable diversion limit in the Plan aims (amongst other things) to return water to the environment. We examine the impact on flows and the returns to irrigation of potential reductions in irrigation allocations, and the interaction with projected climate change impacts. Our analysis is based on an integrated hydrology – economics model of the Murray- Darling Basin, described in Kirby et al. (2012a). The model can quickly and easily run new climate or other scenarios, accounting for flows at key environmental assets. It uses a statistically calibrated economic model that can closely predict drought outcomes accounting for allocation, climate and price circumstances. We examined a 2,800 GL reduction to diversions, and compared it to a base case of no reductions. We modelled the flows and irrigation returns for the no reduction and reduction cases under the assumption of historical climate, a median climate change and a more severe climate change. The climate change projections were those examined in the CSIRO Murray-Darling Basin Sustainable Yields project, slightly extended for more recent years. The broad results of this analysis are that: • The reduction of water available to irrigation under the sustainable diversion limit results in a less than proportional reduction in returns to irrigation. A 25 % reduction in water available on average over 114 years is estimated to reduce the gross value of of irrigated agricultural production by about 3 % on average. This is consistent with observation of reduced water availability in the drought (Kirby et al., 2012b, Conner et al., 2012). • Future droughts projected under climate change might be more severe that those experienced to date, with an expectation of greater economic impact; • A median climate change projection removes from the overall system slightly more water than is gained for the environment under the sustainable diversion limit. Under current sharing rules, this reduction in water comes primarily from the environment. The exact impact on flows varies from valley to valley. The impact of climate change is not considered in other analyses of the Murray-Darling Basin plan. 3 • The returns to irrigation are not much affected by a median climate change, with a 2 % reduction in gross value resulting from 3 % reduction in water availability (on top of the reductions due to the diversion limit). This detail in this result depends on the exact form of water sharing rules, and rules will change in the future; we used a default assumption that the behaviour resulting from the rules will be much as it is now.