Supply and demand for water use by new forest plantations

Nordblom T, Finlayson JD, Hume IH, Kelly JA (2009), Supply and demand for water use by new forest plantations: a market to balance increasing upstream water use with downstream community, industry and environmental use?, Economic Research Report No. 43, NSW Department of Primary Industries.

Executive Summary

This study estimates the economic demand for water by new tree plantations in the 2.8 million hectare Macquarie Catchment in NSW. Trees displace current land uses in the upstream watershed and reduce river flow to downstream communities, agricultural industries and wetland areas. Economic gains are calculated for the upstream areas of new plantations as are economic losses for the downstream agricultural industries. We calculate economic surpluses for both upstream and downstream water users as a consequence of a policy requiring purchase of permanent water entitlements to permit establishing tree plantations.

• If tree products have stumpage values of $70/m3, the model estimates 600,000 ha of new forest would be planted to earn a surplus of $639 million in net present value (NPV) but would transpire 483 GL more water annually, which would be unavailable for downstream users. The model apportions this loss of annual flow as 137 GL to agriculture, 154 GL to wetlands and 191 GL in riparian flow and evaporation. Estimated loss of agricultural NPV, due to lost water, is $233 million. A lower value of $40/m3 for wood products limits forest expansion to 94,000 ha, earning a surplus of $53 million NPV and removing 106 GL of water from the river. Downstream agriculture’s share of this loss would be in the order of 30 GL of water and $40 million in NPV.
• Modelling a policy requiring new upstream tree plantations to buy water entitlements from downstream entitlement holders showed no permanent trade of water upstream at a stumpage value of $40/m3. However, if tree products are valued at $70/m3, the model estimates 90 GL of permanent water entitlements would be purchased to support 78,000 ha of new forest upstream to earn a surplus $192 million in NPV, downstream agricultural sectors would gain $138 million in NPV from this sale of water; a total gain in NPV of $330 million.
• This study has, for the first time in NSW, quantitatively projected the impacts of a policy to require new upstream forest plantations to purchase the water they will use from downstream holders of water entitlements.