Last week Waikato Regional Council released figures totalling the ‘cost’ of returning the Waikato River to a swimmable state. The numbers were pretty scary, suggesting up to an $8b cost depending on how clean we want to get the river.
There are many reasons to doubt the cost would be as high as these numbers suggest. Regardless, the cost shouldn’t be a barrier to fixing the problem; after all it is really an indication of the damage that has been done to freshwater quality by allowing commercial activity a subsidy in the form of the freedom to pollute.
Waikato Regional Council had four scenarios costed:
- having the rivers OK for swimming, taking food and healthy biodiversity ($8b)
- no further water quality decline and improvements in some areas ($4b)
- a general improvement in water quality for swimming, taking food and healthy biodiversity ($4b)
- no further degradation – given that water quality is predicted to get worse because of land use changes ($1b).
Let’s be clear what these estimates mean – they are the present value total costs of achieving the desired outcome. That is all the future costs (forever) brought forward to today’s value. So while $8 billion sounds like a lot, spread over many years that amounts to around 3% of the region’s economy, not half as the local Fed Farmers president Chris Lewis suggested.
Dairy farming will be worst hit, so these published costs sparked a predictable backlash from Federated Farmers warning of dire impacts in the rural economy, with knock on effects for the urban economy too: “it could lead to a massive amount of job losses and depopulation of the region I think.” How valid are these concerns?
What do the results tell us?
It is difficult to know, as the full working behind the results haven’t been published and so are all subject to validation. Apparently the model used to create these numbers has been critiqued overseas, but not by anyone in New Zealand – not a great look.
The model results suggest that in order to make the Waikato River swimmable there will be changes in land use – mainly away from dairy to forestry. As we asked last Friday this begs the question why we have spent the last few years converting forestry to dairy land. There seems to be increasing agreement among farmers and environmentalists alike that dairy conversions – and indeed any intensification of farming – should cease.
However, land use changes won’t be enough. Reducing dairy cow numbers will be an important part of the solution, but there’s plenty of evidence that dairy farmers can maintain milk production and profits while reducing cow numbers. The model assumes that production and profits will fall, and looks at the knock-on effects of this throughout the rest of the Waikato economy, predicting a 2% fall in employment and 3% drop in economic output.
What doesn’t the model tell us?
While no model is a perfect replica of reality, the veracity of predictions from a model are always a function of the limitations presented by the assumptions as well as the caveats that arise by what the model and the analysis omits.
The model only looks at the downside – the losses from agriculture, not the much more difficult to qualify, upsides. How do we value being able to swim, row and fish in the Waikato River? This includes some ‘hard’ economic benefits of having clean water, such as tourism – but the benefit encompasses a lot more, namely the components of well-being which economists increasingly acknowledge extend wll beyond simple GDP- or income-type concepts. The model also doesn’t include the benefits of providing cleaner water for Aucklanders to drink, nor the sediment and weed clogging up hydro dams – another impact of more intensive farming in the area.
Lets look at these results in another way; if we want to swim in the Waikato then we have done $8b worth of damage to it. If we ask dairy farmers to pay for that damage, then the forestry industry suddenly becomes competitive. In other words, we would see conversions from dairy back to forestry at the margin. Given that we should also include the impact on greenhouse gases too (given New Zealand has made international undertakings to reduce them substantially), forestry would be even more competitive. So actually the direct costs of converting land to forestry which the model takes into account, are only a part of the story, a cost/benefit analysis must include the benefits.
Mike Joy’s attempt at counting externalities earlier this year got roundly criticised (and it wasn’t perfect to be sure) but the lack of externalities in this latest analysis is a gross oversight. Fed Farmers claim to just want an ‘even playing field’ – so that towns have to treat their waste in the same way as farms do. They have a fair point – many towns do have to sort their sewage. However, a true level playing field would see farmers paying the full cost of the damage they wrought on the environment and that is of a far greater magnitude than the sewage problem.
Then of course there are things that a model can never tell us. For example, the results don’t include possible innovations that might reduce nitrogen leached by farming, or in adding more value to wood for example. Proper prices on carbon and nitrogen will have all sorts of dynamic impacts we can’t forsee.
It is also worth noting that the model covers the loss of economic benefits – not the impact on the government’s bottom line. Sheep/beef and dairy farming tend to minimise their tax bill by relying on tax free capital gain – so a reduction in activity may not mean a commensurate reduction in tax .
Finally, time is critical. Simply put, costs of change would be lower if the change went slower than the model assumes.
Questions about the model
Without seeing the detail of the model, it raises many questions about what the numbers include. For starters some of the results look sketchy – how can horticulture profit fall by over 100%?
The model also seems to assume that a job lost is a job lost, but economies are much more complicated than that. People might lose a job, but they move on and get other jobs. That is the benefit of a flexible, dynamic economy. They may not have to leave the region to find work. This is the same problem that many economic models have – for example why the benefits of hosting the Rugby World Cup were overstated because they assume every new job created adds to employment, when often people shift jobs from elsewhere.
There are also big questions about how the model estimates drops in production and profit. There is a general assumption that a fall in production means a fall in profit, however as we saw in last week’s video this is not the case – in some cases farmers can reduce production, thereby reducing their environmental impact, without hurting profit. Also, some properties and farming practices cause a lot more damage than others. Stopping dairy farming on land with leakier soils (which leach more nitrogen) or banning practices like winter cropping might help a lot.
In short, if these numbers are to be taken seriously then the model needs to be made public so that it can be critiqued. Apparently this will happen – but until then the numbers used should be considered at best as a worst case scenario, but more likely so ropey as to be unhelpful.
Suck it up (not the river!)
With all those caveats, it is still likely that cleaning up the Waikato River will impose a real and substantial cost – otherwise no polluter would object to paying for the damage they’ve caused! Production will no doubt be less than it could have been. If we want a swimmable Waikato River, then there are probably too many cows in the catchment, particularly given the way the dams slow the water flow. That shouldn’t be viewed as an $8b cost. It should be viewed as us allowing the commercial users of the river – electricity companies and farmers alike – to grow too much because they haven’t been paying the true cost of doing business.
The majority of the impact will be borne by a fall in land prices. That will hurt, especially those with a lot of debt, but it should be no surprise as we have known for many years that the Waikato River was in trouble yet we’ve allowed the problem to get worse. Land prices should not have been that high in the first place.
The moral of the story is – don’t buy dairy land in the Waikato at the going market rate. And if you have recently done so we hope you did your homework because this problem was completely predictable.