Economic effects of irrigation water pricing in New Zealand: An analysis using the GTAP model

The aim of this study is to analyse the effect of irrigation water pricing on the New Zealand economy using a modified version of the Global Trade Analysis Project (GTAP) model and database. The primary user of irrigation water in NZ is dairy, and since 95 percent of NZ dairy production is exported, analysis using a global general equilibrium model will contribute important insights. While use of a global model brings significant benefits, a shortcoming of using GTAP for country-level analysis for analysis of issues such as water is the lack of regional specification within the country. Since regions of a country like New Zealand vary substantially in terms of what they produce and how much irrigated water is used, the impacts on different regions within the country may differ greatly. For example, the Auckland Region is the commercial capital, producing over a third of country’s economic output, yet it produces only 2% of NZ dairy. To overcome this limitation, NZ is split into 15 regions. In the absence of the availability of detailed input-output data for regions within New Zealand, we use regional product as weights when undertaking the regional splits. To examine the effects of irrigation water pricing, the GTAP model is further modified by splitting the land endowment into irrigated and non-irrigated for each newly region. This, again, is highly unevenly distributed: the Waikato Region is the largest single dairy producing region in the country (producing 24 percent of all dairy), but it includes less than 3 percent of all irrigated land in NZ. By contrast, the Canterbury Region comprises over 60 percent of all irrigated land in New Zealand, but produces only 18 percent of the country’s dairy output. This model modification follows the approach of Calzadilla et al (2011) as used in the creation of the GTAP-Water (GTAP-W) model, however, in our work this is only implemented for the newly created sub-regions of New Zealand rather than for the whole world. This approach allows in-depth analysis of the impact of freshwater management policies in New Zealand that will affect the price of water with particularly important outcomes for the dairy industry, including on exports to international markets.