Future scenarios for the southern Murray-Darling Basin water market

Since the peak of the Millennium drought, the southern Murray-Darling Basin (sMDB) has seen large increases in nut and cotton plantings, decreases in water supply due to environmental water recovery and tighter limits on water trade between regions. These changes have raised concerns about how the water market might cope under drought conditions.

In this study, ABARES applies an economic model of the sMDB to simulate what would happen to the water market under a repeat of the Millennium drought, with current water demand, environmental water recovery, trade limits and carryover rules. These scenarios provide an indication of future water prices and trade patterns across the sMDB under a repeat of historical climate conditions (for the period 2002-03 to 2016-17).

Key Issues

• Modelling results suggest that under a repeat of historical conditions allocation water prices in the sMDB would rise no higher than the peaks observed during the previous drought. • Whilst demand for water has increased for cotton and almonds, this has been more than offset by reductions in demand in other industries particularly, grazing, dairy and rice. • Improvements in carryover rules will help to limit price rises under a repeat of the drought, with much larger volumes of water being stored between years. • Trade limits will likely be binding more often in the future, partly due to the changes in water demand. • While water price peaks are simulated to be no higher under a repeat of extreme drought conditions, they are higher on average, due in part to environmental water recovery. The modelling suggests a change in the distribution of prices, with fewer years of low prices.