Upstream demand for water use by new tree plantations imposes externalities on downstream irrigated agriculture and wetlands

Large-scale tree plantations in high rainfall upstream areas can reduce fresh waterinflows to river systems, thereby imposing external costs on downstream irrigation,stock and domestic water users and wetland interests. We take the novel approach ofexpressing all benefits and costs of establishing plantations in terms of $ per gigalitre(GL) of water removed annually from river flows, setting upstream demands on thesame basis as downstream demands. For the Macquarie Valley, a New South Walessub-catchment of Australia's Murray-Darling Basin, we project changes in land andwater use and changes in economic surpluses under two policy settings: without andwith a policy requiring permanent water entitlements to be purchased from downstreamparties, before plantation establishment. Without the policy, and given a highstumpage value for trees ($70/m3), upstream gains in economic surplus projected fromexpanding plantations are $639 million; balanced against $233 million in economiclosses by downstream irrigators and stock and domestic water users for a net gain of$406 million, but 345 GL lower mean annual environmental flows. With the policy,smaller gains in upstream economic surplus from trees ($192 million), added to netdownstream gains ($138 million) from sale of water, result in gains of $330 millionwith no reduction in environmental flows. Sustaining the 345 GL flow for a $76 million(406'330) reduction in gains to economic surplus may be seen to cost only $0.22million/GL; but this is much lower than the market value of the first units of thatwater to agriculture and forestry.