SEA Working Paper 2000/01
Salt Levy? The Complex Case for Public Funding of Salinity
David J. Pannell
Agricultural and Resource Economics, University of Western Australia, Nedlands WA 6907
Summary
A large amount of public money is spent in attempts to manage dryland salinity in Western Australia, and the perceived need for even greater funding has led to public discussion of a possible "salt levy". Farmer groups argue that any new money should all be passed on to farmers to help them implement on-ground works.
From the evidence of hydrological and economic research, and experience with large-scale implementation of salinity treatments, it is clear that meeting these demands from farmers would be highly undesirable if we wish to achieve the greatest possible reduction in salinity costs. Rather, the most effective uses of public funds for salinity would include, in different circumstances:
It is also important to recognise that for some threatened assets, the circumstances are such that no public investment of any type could be justified.
A large expenditure of public funds for salinity can easily be justified on the basis that, if it is well spent, it will avoid substantially greater public costs in the near and distant future. Unfortunately, it would also be easy to spend the funds in a way that has virtually no sustained benefit. Providing public funds as subsidies to farmers for measures that are not effective (e.g. revegetation of small areas that have not been strategically selected) will not only be wasteful, but also morale sapping for the farmers. We have also tended to devote too many resources to activities intended to inform and persuade farmers to adopt new farm practices, before we have developed practices that are suitable for them to adopt.
Background
A "Salt Levy" has been proposed in Western Australia, as a means of raising funds for actions to counter salinity (see "Salt Levy – You will pay for this", The West Australian, 5 February 2000, p. 1). This discussion paper addresses the question, "In what circumstances and for what uses is it reasonable to spend public money in the battle against salinity?" The conclusion is that substantial public funding is justified, but probably not for the reasons or for the uses that most expect.
The question of a salt levy arises because of the many non-agricultural costs of dryland salinity. These include: mass extinctions of native species; damage to physical infrastructure such as buildings, roads and bridges; increased severity and frequency of floods; river salinity; impacts on the rural social fabric; and perhaps relatively intangible but long term psychological "costs" felt by many in the community due to the permanent loss of swathes of productive agricultural land (a loss of land conservation value). In calculations done for the WA Salinity Council in 1999, I concluded that the overall significance of these non-agricultural salinity costs is at least as great as that of the agricultural costs, and perhaps much greater.
The issue is complicated because of the great diversity of circumstances behind these non-agricultural costs, including variation in the hydro-geology, the economics, the history, the agricultural systems, and the available salinity treatments. It is compounded by widespread misconceptions about the hydrology and economics of salinity. A key assumption underlying this discussion is that large-scale establishment of perennial plants is the only strategy that will make a substantial, broad-scale impact on salinisation of land. Drainage will help, but hydrological modelling shows that it will be far from sufficient.
For convenience, I will use the term "salt levy" to refer to any public investment in salinity management. There is already a very substantial salt levy, in the sense that taxation revenues are allocated to the issue. The points discussed here apply to both the expenditure of traditional government revenues and of any special levy that is put in place in future.
In making a balanced assessment of a salt levy, it is important to make two distinctions. The first is to divide salinity costs into losses of agricultural production and the rest. The second is to divide the costs into those for which on-farm treatments should play a major role and those for which on-farm treatments would be relatively unimportant or ineffective. The four resulting categories of costs have quite different statuses regarding the justification and best use of a salt levy. It is also possible to make good judgements about the relative importance of the four categories.
Key point 1: In considering the justification and uses of a salt levy, it is important to divide salinity costs into losses of agricultural production and the rest, and to divide the costs into those for which on-farm treatments should play a major role and those for which on-farm treatments would be relatively unimportant or ineffective.
Table 1 presents the four categories and addresses the question of how a levy should be used across the four categories. A parallel question is, How common are the four categories? Computer modelling results from hydrologists and agricultural economists in Western Australia provide important information on this question. (Comments below about the frequency of the four categories apply specifically to Western Australia.) Some of the results are unpalatable and some surprising but we ignore them at the peril of making very poor decisions about salinity spending.
Category 1
Category 1 is non-agricultural costs that are not efficiently or adequately controlled by on-farm treatments. Given the common idea that salinity starts on farms and moves to affect non-agricultural resources, it will be a surprise to many that some of the important non-agricultural costs are largely created on non-agricultural land (category 1a). This particularly applies to many of the rural towns suffering from salinity problems.
Key point 2: Some important non-agricultural costs are largely created on non-agricultural land (e.g. salinity in some rural towns).
For example, the town of Merredin is acting to prevent millions of dollars of damage to buildings and roads due to rising saline groundwaters within the town. The main source of these waters is Merredin town site itself. In Merredin there are now roads, footpaths, buildings and open space where there was once native vegetation finely adapted to use up every drop of rain. That rain now adds to and raises the groundwater within the town. In addition, Merredin (very understandably) compounds the problem by importing additional water from Mundaring Weir, some of which also makes its way into the groundwater. If the surrounding farmers were to revegetate all of their farms, it would not prevent much of the salinity damage expected in Merredin town. The town itself needs to capture and divert its own rainwater, reduce releases of scheme water and probably undertake engineering works such as pumping. Merredin is not a particularly unusual town in this regard. Other WA towns for which hydrological studies have been done are in similar circumstances, with in-town actions being the most pressing need. For this type of salinity cost, the grounds for a salt levy seem clear and direct. The only argument would be over who should pay it: those directly affected or the community more generally.
Table 1. Is public expenditure on salinity treatments justified?
Potential effectiveness of on-farm treatments |
||
| Type of damage | Low |
High |
| Non-agricultural | Category 1a: Low effectiveness
because damage generated off farm. Levy justified for
off-farm treatments if these would be cost-effective.
Category 1b: Low effectiveness because benefits too little, too late. Levy justified for off-farm treatments if these would be cost-effective. |
Category 2a: Treatment benefits
exceed costs. Levy possibly justified, directed at
on-farm treatments. Category 2b: Treatment costs exceed benefits. Levy not justified. |
| Agricultural | Category 3. Levy not justified. | Category 4a: Treatments profitable
on farm. Levy not justified. Category 4b: Treatments not profitable on farm. Levy possibly justified, directed at on-farm treatments. |
A second case where a non-agricultural cost may be allocated to category 1 is where the impacts of on-farm treatment would be too little or too late to save the resource (category 1b). Many natural reserves or wetlands in the agricultural district are in this category. In these cases, off-farm treatment such as drains and pumping within or adjacent to the natural areas may be necessary. Given that benefits from these treatments would accrue to the community as a whole, that the problems were generally not caused by current farmers, and that current farmers have no direct power to prevent the problem, the case for public funding of these off-farm treatments also seems reasonably strong.
Key point 3: For some non-agricultural costs, on-farm treatment would be too little or too late to save the resource (e.g. losses of biodiversity in some key reserves).
Another example in category 1b is probably the increased flood risk we will face throughout much of the south west of WA. In this example, it is true that water running off salinised and/or water-logged farm land is the main source of the problem, but the total expense of treating at a sufficient scale would be so large that we may be better off just putting up with the flood costs, trying to minimise them by engineering works in areas of high value and high risk. This is not necessarily the conclusion we will reach in each case, but we will need a case-by-case assessment and it should not be assumed that a salinity cost such as flooding is worth avoiding at any price. The salinity cost needs to be weighed up against the cost of preventing it.
Key point 4: For some non-agricultural costs, the total expense of on-farm treatments at a sufficient scale would be so large that we may be better off just putting up with the salinity impacts, trying to minimise them by engineering works in areas of high value and high risk (e.g. increased flood risk in some catchments).
Category 2
Category 2 is where non-agricultural damage is readily preventable by on-farm treatment. Where such a situation can be identified, and the benefits from treatment are seen to be greater than the costs (category 2a), an arguable case for the public bearing the cost can be made. I will outline the elements of both sides of that argument later on, but for now a key observation is that examples of category 2a are relatively rare. It is hard to identify clear examples, with the most likely candidates being catchments used (or earmarked) for potable water supplies. These have been subject to a range of government initiatives, with widely varying degrees of success. Overall, there appears to be a need for more extensive and vigorous action to protect these water resources. For other non-agricultural assets, the scale of treatment that is apparently necessary will often mean that on-farm treatment costs exceed agricultural plus non-agricultural benefits (category 2b).
Key point 5: Cases where major non-agricultural damage is readily preventable by on-farm treatment are relatively rare.
In general, for the full rage of non-agricultural physical impacts, there is a clear need to better define the best mix of off-farm and on-farm treatments, and to assess the urgency and economic costs and benefits of treatment. To date, this has not been done other than in a partial and superficial way.
Some key non-physical impacts are tied up with on-farm physical impacts (some social impacts, losses of land conservation value). These will be discussed following consideration of the more straightforward physical and economic on-farm impacts.
Category 3
The third category of salinity costs is on-farm impacts with low potential for on-farm (or any other) treatment. This category accounts for a depressingly large area of agricultural land. The most recent sophisticated hydrological modelling is indicating that, almost regardless of what treatments are implemented in the short-to-medium term, an additional 2 million hectares of agricultural land in WA will become salt affected. Beyond that, a further 2 million hectares is at stake, with its preservation depending on the extent of treatments that are implemented. However, the medium-term loss of 2 million ha (taking the total from 2 to 4 million ha) is already not practically preventable. It would not be sensible to spend public money (or private farmer money) on fruitless attempts to preserve this land, assuming that the unprotectable land can be identified. A potential exception to this observation is where treatments can substantially delay the salinisation of land, allowing agricultural production to continue in the meantime and perhaps allowing the hope that new, more-effective treatment options will become available during the window of opportunity that is created.
Key point 6: There are large areas of land that will go saline almost regardless of the scale of current treatments. Spending money to attempt to prevent this will be fruitless.
Category 4
The final category is on-farm costs that are physically preventable. Some of these have treatments that are clearly competitive if not superior in long-run profitability relative to existing farming enterprises, especially when indirect on-farm benefits are considered (e.g. blue gums in suitable environments near the south coast). Unfortunately this accounts for a minority of the threatened agricultural land. In most areas, profitable farming systems based on perennial plants are not available. Work to develop a range of perennial plant industries is ongoing, but is still a relatively small part of the total effort. For farmers lucky enough to have land suitable for profitable perennial plants (category 4a), there is surely no case for major public financial assistance on top of that which went into development of the plants, and perhaps funding of communication activities to encourage rapid adoption. It may, however, be desirable to accelerate their uptake through risk reducing/profit sharing schemes (as with blue gums).
For land where no profitable perennial plants are available (category 4b), further complexities arise. Across the state, there is land in every category from "slightly unprofitable perennials" to "extremely unprofitable perennials". For land towards the "slightly unprofitable" end of the scale, public funding is potentially justifiable and effective at enhancing the uptake of salinity treatments (as further discussed below). Unfortunately, the area of land to which this applies is again a minority of the agricultural region. For land towards the "extremely unprofitable" end, incentives provided by public funding are unlikely to be sufficient to prompt dramatic adoption of perennials. This would apply to a large proportion of the wheatbelt. Offers of financial support in such cases will mainly be rejected, assuming that uptake is voluntary, unless the support is greater than currently appears likely (or even desirable).
In some cases, perennials may appear unprofitable to farmers, but profitable from a government perspective, due to use of different "discount rates" (effectively different interest rates charged on up-front costs). In such cases, subsidies appear to be potentially justifiable. They may or may not be best paid as subsidies on interest rates.
Key point 7: Where agricultural land can practically be protected from salinisation, the case for public funding depends on the on-farm profitability of perennial plants and on the level of public benefits that would be generated.
In cases where implementation of treatments on-farm is most pressing (whether they be in categories 2a or 4), the most efficient and effective approach to protecting our resources may actually be for the government to purchase and revegetate the land. Such an approach would, however, be extremely expensive and would need to be carefully evaluated on a case-by-case basis.
Justifications for public funding to prevent losses of agricultural land
Perhaps the most difficult aspect of the salinity issue to consider in a logical and systematic way is the potential for public funds to be spent for the purposes of protecting agricultural land. This is distinct from the prevention of non-agricultural physical costs, which were dealt with in categories 1 and 2.
Some would argue that there is no justification for spending public money to preserve what is really a private asset – that salinity treatments intended to conserve agricultural land should be considered by farmers on their economic merits, and paid for by farmers if they choose to do so. Farmers are the ones in the best position to know whether such expenditures are economically justified. If they are not justified, because the long-run costs of treatment exceed the long-run economic benefits, farmers should be free to let the land go saline.
This line of argument should be heard, but it is too narrow and simplistic to be the sole guide to policy. There are at least three issues that it neglects.
The key questions are:
Whether we are willing to provide enough funding to make a real difference depends on the long-run on-farm profitability of the available perennial options. The more adverse are the on-farm economics of available salinity treatments, the more likely it is that we will be unable or unwilling to afford the price of preventing these non-physical impacts. I have already noted that the on-farm economics of available perennial plants is highly adverse for much of the wheatbelt. The only practical way of reducing this problem seems to be by R&D to develop more profitable options.
Key point 8: In principle, a case can be made for public funding to preserve private agricultural land, but given currently available treatment options, the level of funding justified will often not be enough to make a difference. This points to the need for benefit-cost analyses to guide judgements about public financial assistance.
Subsidy versus penalty
While the public discussion has been about a levy to collect funds from the broad community, a counter-view being proposed by some is that farmers should be legally required to take action to prevent or repair environmental damage, in much the same way as the state places requirements of this type on the mining industry. It is important that proponents of this approach recognise that it would be ineffectual against costs in categories 1a, 1b, 2b and 3 and that these categories account for a substantial proportion of the total prospective salinity costs.
For categories 2a, 4a and 4b, it is meaningful to ask whether the mechanism for promoting action should be the provision of public money to subsidise farmer action, or legal requirements backed by penalties for insufficient action? Carrot or stick?
Table 2 summarises the arguments in favour of each of the possible approaches. Argument 1 in favour of a financially supportive approach is that most agricultural land was cleared at the advice and encouragement of the state government, and in many cases land was available only under "conditional purchase", with rapid clearing legally required. On the other hand, farmers would surely have cleared regardless of these requirements. Most did so to an extent beyond that required by their purchase agreements.
Table 2. Arguments in favour of carrot or stick approaches
| Carrot | Stick | |
| 1. | Clearing encouraged or required by government. "Conditional purchase". | Farmers would have cleared anyway. |
| 2. | Low average income or farmers. | High average wealth of farmers. |
| 3. | Beneficiary pays principle. | Polluter pays principle. |
| 4. | Monitoring/enforcement costs of stick approach. | Risk of rorts in carrot approach. |
| 5. | Feelings of compassion. | Feelings of rights infringed. |
An argument against funding transfers to farmers is that their average net wealth exceeds the average for non-farmers by a significant margin. On the other hand, a large number of farmers have a low annual income, and their wealth may not be readily available in a liquid form to fund the direct financial costs of salinity treatments.
Different government policies make inconsistent and confusing usage of the so-called principles of "polluter pays" and "beneficiary pays". In reality, neither are truly principles in the sense of a provable rule, but merely value judgements about what is fair. The existence of these principles provides no real help in defining our approach to salinity – policy makers still have to choose subjectively between them.
The fourth set of arguments relates to how easily and cheaply the two approaches can be implemented in practice. Each has problems in this regard, and experience indicates that the problems can be very substantial indeed. Historically, these "transaction costs" have barely been considered when choosing among policy options, but particularly in the case of salinity this is likely to lead to poor decisions. My judgement is that the transaction cost argument favours a "carrot" based approach, provided that the expenditure can be well targeted and possible rorts avoided.
Finally, the emotional responses to the alternatives can strongly favour either approach over the other.
Overall, there appears to be no compelling case to prefer one approach to the other. In reality, the best approach is likely to be a combination of the two, with different approaches targeted against different types of salinity cost.
A hybrid of the carrot and stick approaches is also possible. Farmers would be required to act in certain ways, and be compensated for doing so. For a variety of reasons, this approach should only be considered for protection of very high value, non-agricultural resources, requiring very specific and clearly defined treatments. There is a precedent for the approach; compensation was paid for clearing bans in the upper Kent catchment, which was earmarked for future potable water supply to Albany. However, the experience was very negative in terms of policy effectiveness. Compensation was paid, but much of the remnant vegetation meant to be protected has continued to degrade and now offers only partial benefits for salinity prevention. Clearly, not clearing is one thing, and properly protecting uncleared vegetation is another. The experience emphasises the critical importance of effective monitoring and enforcement in any financial arrangement with farmers to prevent salinity.
Key point 9: Any financial arrangements with farmers to prevent salinity may require a major effort in monitoring and enforcement to avoid problems experienced in the past.
Finally, in some cases, neither carrot nor stick approaches are appropriate. I note two arguments that would hold against both approaches.
Neglected needs
Amidst all the complexity and ambiguity of these issues, one conclusion comes through clear and compelling. The complexities would be dramatically reduced and the adoption problem substantially overcome if a wide range of profitable perennial plants were available to farmers across different climatic zones and soil types. We could, in this ideal situation, convert our farm land from profitable but unsustainable production of annual plants, to profitable and sustainable production of perennials. There is a big "if" in this approach, but it stands out as the pathway most likely (or least unlikely) to succeed in reducing those salinity costs that originate on farms. Unfortunately, investment in development of perennial plant options has been, and continues to be, a small component of the salinity budget. I believe that in this we are making a tragic error.
Key point 10: There should be a major additional investment in development of profitable perennial plant-based farming systems.
Another stark reality that has not been adequately faced is that, regardless of what we do now, we are going to have a lot more saline agricultural land. We have, in the past, invested in R&D to develop productive uses of saline land, but in WA this has now fallen away to almost zero. It might be argued that the R&D has been completed, but we do not apply that argument to non-salinity-related issues like breeding of improved wheat varieties. Given the very large areas involved, we will be missing a major opportunity if we do not invest substantially in on-going R&D to steadily improve, refine and add to the available technologies for profitable use of saline land.
Key point 11: There should be a major additional investment in development of profitable uses for saline land.
A bid for Commonwealth funding for a Cooperative Research Centre (CRC) to address these R&D needs is currently being prepared. It seems to me that the state is making a mistake if it relies on a bid that may or may not succeed for the provision of these critical needs. In addition, the scale of activity that should be undertaken is greater than can be encompassed within a CRC bid. The CRC approach has particular advantages for salinity, as it will bring together diverse scientific expertise from across the country to focus on the problem. If the state does decide to inject funds into this area, it should probably do so via the vehicle of the CRC.
Underlying these comments is a recognition that no single strategy or treatment will be suitable for handling the multiplicity of problems and environments. We need a smorgasbord of treatment options to select from, whereas at present we have a very short fixed menu, with the best dishes available at only a minority of outlets.
Concluding comments
There are some hard and dismal truths coming out of current research. Their implications have not yet been faced squarely and factored into state’s strategy for salinity. Hard decisions will be needed to prioritise some non-agricultural costs and write off others, but these decisions have not yet even been approached. They will be politically charged decisions, but they must be seriously addressed if we are to avoid needlessly damaging public and environmental resources and wasting public money.
If a new salt levy is implemented, one of the most difficult issues politically will be demands from farmer groups that the money should all be passed on to farmers to help them implement on-ground works (e.g. "Salt cash ‘must hit target’," The West Australian, 7 February 2000, p. 9). It is absolutely clear that such an arrangement would be highly undesirable if we wish to achieve the greatest possible reduction in salinity costs. The best usage of funds from a levy would include, in different circumstances, direct investment in off-farm treatments for protection of non-agricultural assets, re-acquisition and revegetation of selected land of critical importance, investment in development of more profitable perennial plant options for farmers, and perhaps, in carefully targeted cases, subsidies for on-farm treatments. It is also important to recognise that for some threatened assets, the circumstances are such that no public investment of any type could be justified.
A large expenditure of public funds for salinity can easily be justified on the basis that, if it is well spent, it will avoid substantially greater public costs in the near and distant future. Unfortunately, it would also be easy to spend the funds in a way that has virtually no sustained benefit. Providing public funds for measures that are not effective (e.g. revegetation of small areas that have not been strategically selected) will not only be wasteful, but also morale sapping for farmers, and will likely lead eventually to conflict between the funders (society) and the recipients (farmers).
In the past, we have tended to devote too many resources to activities intended to inform and persuade farmers to adopt new farm practices, before we have developed practices that are suitable for them to adopt. The belief of some that effective and economic salinity treatments already exist, awaiting only for farmers to adopt them, is mistaken for most regions of WA.
Policy makers need to do a thorough and systematic job of evaluating the potential uses of salinity money, with a greater level of rigor than has been present in the policy process so far.
To ensure that this happens, the state requires a process for the systematic completion of the analysis I have commenced in this discussion paper. I recommend to the state the commencement of such a process as an important step in dealing with salinity as effectively and efficiently as possible.
Key point 12: A large expenditure of public funds for salinity can easily be justified on the basis that, if it is well spent, it will avoid substantially greater public costs in the near and distant future.
Key point 13: Unfortunately, it would be easy to spend the funds in a way that has virtually no sustained benefit.
Key point 14: It would be a serious mistake to meet farmers’ demands that all new funding should be passed on to farmers.
Key point 15: Hard decisions are needed to prioritise some non-agricultural costs and write off others.
Key point 16: The state requires a thorough, systematic and accountable process to make the necessary hard decisions
Acknowledgements
I am very grateful to the following people for providing helpful comments, suggestions and information: Graeme Olsen, Ruhi Ferdowsian, Richard George, Bob Nulsen, Dan Carter, Allan Herbert, Ross Kingwell, Roy Murray-Prior, Martin van Bueren and Steven Schilizzi.
Citation: Pannell, D.J. (2000). Salt levy? The complex case for public funding of salinity. SEA Working Paper 2000/01, Agricultural and Resource Economics, University of Western Australia. http://www.general.uwa.edu.au/u/dpannell/dpap0001.htm
For a brief version of the article, prepared with Ted Lefroy for submission to the state-wide morning newspaper, The West Australian, see this web page: http://www.general.uwa.edu.au/u/dpannell/dpap0001b.htm (9K)
For the version of the article that was actually published by The West Australian, see this web page (the comparison with what we sent them is interesting): http://www.general.uwa.edu.au/u/dpannell/dpap0001n.htm (9K)
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