Economic Effects of Water Recovery on Irrigated Agriculture in the Murray‐Darling Basin

A key issue facing water planners and policy makers is the cost of reallocating water from extractive uses, such as irrigated agriculture, to environmental flows. To quantify these costs, a framework to analyze the economic trade-offs from water use reductions in irrigated agriculture is developed that has general applications, but is calibrated to Australia’s Murray-Darling Basin. The framework includes an 18-region integrated irrigated agriculture water model of the Murray-Darling Basin that quantifies the impact on irrigated agriculture net profits associated with reductions in surface water extractions. The model shows that substantial reductions in water extractions of up to 40% across the entire Basin impose only a moderate reduction on net profits in irrigated agriculture, Basin-wide. However, the results also indicate that in regions where less profitable irrigation activities dominate, irrigated water use would fall dramatically although net profits would decline by proportionately by much less. The findings suggest that reductions in water diversions in irrigated agriculture at least cost so as to increase environmental flows would: (1) Concentrate the reductions in water extractions by irrigated agriculture in relatively few parts of the Murray-Darling Basin and, principally, on only three less profitable crops; (2) Reduce net profits, both regionally and Basin-wide, but these declines would be proportionally much less than the percentage reductions in water use; and (3) Ensure the present value of foregone net profits in irrigated agriculture is less than the amount currently budgeted by the Australian government to reduce surface water extractions in the Murray-Darling Basin.