SEA Working Paper 99/05

Literature Review: Regional Economic Studies of Dryland Salinity

Martin S. van Bueren and David J. Pannell

Agricultural and Resource Economics, The University of W.A., Nedlands, 6907

Introduction

There is a large and growing body of literature that deals with the economics of dryland salinity. The breadth of studies in this field is exemplified by a bibliography compiled by Wilson (1995b). A large proportion of studies focus their attention on the on-site costs of salinity to individual farm businesses. A smaller proportion examine the economics of salinity at a catchment or regional level. A mixture of both empirical and theoretical work appears in the literature.

This review confines its scope principally to economic studies that have dealt with salinity at a regional level. While individual-farm models play a fundamental role in evaluating the economics of salinity (see Pannell 1998), the Salt Scenarios 2020 Project is primarily concerned with aggregating and interpreting this information in a regional context.

The review serves three purposes. Firstly, it provides a background to the methods that have been used in the past for assessing salinity costs and the benefits of control strategies. Secondly, it establishes some general principles and guidelines for examining the salinity problem. Thirdly, it highlights some economic issues that are pertinent to salinity and refers the reader to further sources of information. The studies reviewed are by no means an exhaustive list of all work that has been undertaken in this field. However, every endeavour was made to examine a cross-section of work in order to gain an appreciation of the range of methodological approaches and issues.

In fulfilling these aims, the review builds upon the findings of a national workshop that was convened by LWRRDC in 1993 to critically assess a range of economic procedures that have been applied to salinity (Webb and Price 1993).

This paper is organised into six sections, each of which describes particular features of previous studies. In the process, the strengths, limitations, and relevance of each study is explained. In summary, the six sections are:

• Form of the economic analysis
• Scope of the analysis: Single or multiple stakeholders.
• The representation of the time dimension and establishment of benchmarks for evaluation.
• Nature of the analytical model
• The link between economics and hydrology
• Measurement of costs and benefits

Form of the economic analysis

Economic studies of dryland salinity generally belong to one of two types, namely:

• Cost studies: These studies only examine the costs of salinity. Costs are either expressed as an annual dollar amount or as the discounted sum of future costs over a given period of time. Studies of this type are useful for gaining an appreciation of the magnitude of the salinity problem in economic terms. However, they do not provide any indication as to whether control strategies are economically justified or at what scale they should be implemented. In order to make these decisions it is necessary to know the cost of implementing the control measures and their effectiveness.

The Australian Bureau of Resource Economics (ABARE) have recently conducted an extensive cost study of salinity in the Loddon-Campaspe catchments of Victoria. Similar work has been undertaken for catchments in New South by Ivey ATP (1998; a, b, c). Studies of this type are a starting point for assessing the economics of control strategies because they indicate the size of benefits that could be realised if salinity could be abated. However, their usefulness is limited by their very partial nature.

• Benefit-cost studies: These studies explicitly analyse the benefits and costs associated with strategies for controlling salinity. Hence, the purpose of these studies is to determine whether it is economically desirable to implement a particular strategy and, if so, at what scale. Blyth and McCallum (1987) discuss the issues that need to be considered when conducting this type of analysis. They emphasise the importance of knowing how costs and benefits change with successively higher levels of abatement. The optimal level of abatement is then given by the point at where the cost of an additional unit of abatement (termed marginal cost) is equal to the benefit generated by that unit reduction in salinity (termed marginal benefit).

Benefit-cost studies require knowledge about the relationships between particular land management practices, hydrology and plant production. This information is typically scarce and, consequently, good benefit-cost studies are few in number. Modelling work by Greiner (1997) represents one of the more comprehensive regional assessments of salinity. Their model focuses on the net benefits of various management strategies in the Liverpool Plains catchment of New South Wales.

In addition to the basic distinction between cost studies and benefit-cost studies, the methods employed to analyse costs and benefits also differ. One type of technique that has been used is input-output analysis. This technique was recently used to assess the socioeconomic futures in irrigation regions of the Murray Darling Basin that are being affected by salinity (see Fordham 1998). Input-output analysis (IOA) identifies the numerical input-output relationships that exist between different sectors of the economy. Impacts are measured in terms of output value, employment, household income, and business turnover.

While IOA can be a useful planning tool, it can also lead to some misleading conclusions about the economic worthiness of projects designed to control salinity. This is because it primarily uses expenditures rather than measures of economic well-being as its metric of economic consequences. As such, it is possible to draw the fallacious conclusion that salinity is "good for the economy" if it induces farmers to increase their spending on measures to maintain productivity. Similarly, it is conceivable that IOA could view an expensive and ineffective control strategy as being "economically attractive" if expenditure on the project stimulates employment and non-farm income. Clearly, this technique has some serious limitations for assessing the economic consequences of alternative scenarios.

The main technique used to assess the economic impact of salinity, or the economic attractiveness of control strategies, is benefit-cost analysis (BCA). Unlike IOA, this technique explicitly examines the change in economic welfare (termed "economic surplus") for each sector affected by salinity. Although there is a well-developed literature on the limitations and weaknesses of BCA (e.g. Hanley and Spash 1993), it is the only practically applied form of analysis that is capable of consolidating information about welfare changes across all sectors of the community (Bennett 1998). Consequently, provided that it is applied with care, it is the preferred technique for providing input to decisions about the allocation of resources and for identifying efficient policies (defined as those policies that maximise net benefits to society).

Scope of the analysis: Single or multiple stakeholders.

The previous section distinguished between studies which simply evaluate the costs of dryland salinity and those which examine the costs and benefits of controlling the problem. In this section a further distinction is made between studies based on their scope (Table 1). One class of studies limit their scope to only analysing impacts experienced by the farming sector, whilst another category evaluates the impacts experienced by multiple stakeholders (including the farm sector).

Salinity imposes costs on a number of different stakeholder groups. A handbook recently produced by the National Dryland Salinity Program identifies five distinct groups together with a detailed outline of the type of damage costs associated with each group (Martin and Metcalfe 1998). The groups identified were:

• primary producers (farmers).
• urban and rural households
• non-farm businesses (eg. tourist operators, firms supplying goods and services to farmers etc.)
• local councils
• public utilities and government agencies

A sixth stakeholder group comprises consumers of "services" that flow from environmental assets such as native bushland, wetlands and waterways. Examples of these services include recreation, biodiversity, flood control, nutrient filtration, carbon sequestration and aesthetics.

The effects of salinity are frequently referred to as being "on-site" or "off-site". While these terms are commonly used, their meaning is rarely made explicit. At a regional level, on-site costs generally refer to those which are suffered collectively by farmers. These costs are also known as private costs because they are incurred by private landholders. Off-site costs include those which are experienced by non-farm groups located either within or outside the region. The bulk of these costs are termed public or social costs because they are borne by society rather than private firms.

A slightly different definition of on-site and off-site costs applies if salinity is being examined from the perspective of an individual farm. In this case, on-site costs refer to those which are inflicted on an individual's farm property, while off-site costs include those which are imposed by an individual farmer on other farmers and/or non-farming groups. The differences in definition are subtle, but important, because in the context of an individual farm analysis, off-site effects do not necessarily equate to public costs.

Most of the empirical work that has been conducted at a regional level only considers on-site costs (Table 1). Furthermore, the scope of analysis is often limited to quantifying changes in farm production. Other private costs, such as damage to farm infrastructure and water supply, are rarely assessed.

Off-site effects are frequently ignored because they are more difficult to quantify and some are intangible. However, in recent years some efforts have been made to rectify this deficiency. Notably, a series of reports published by ABARE examine the costs suffered by multiple stakeholders in the Loddon-Campaspe catchments of Victoria (Table 1). A similar analytical method has been applied to a range of catchments in New South Wales which form part of the Murray Darling Basin (Ivey ATP, 1998 a,b,c). Work by Gutteridge Haskins & Davey Pty Ltd (1999) quantifies the costs suffered by various users or saline water from the River Murray. Some work has also been undertaken to quantify the non-market costs associated with salinity damage to the environment (Bennett et al. 1997).

The studies cited above investigated the range of stakeholders affected by salinity and the likely magnitude of costs involved. However, they did not estimate the net benefits of implementing strategies for controlling salinity. Nor did they identify how benefits and costs are distributed across stakeholders. In fact, there is a distinct lack of work that tackles this task. Two exceptions are studies by Wilson (1993) and Oram and Dumsday (1993). Both authors compare the net private benefits of reducing recharge alongside the potential public losses due to lower water yield from the catchment. This type of analysis enables a relatively objective appraisal of the total net value of undertaking a control program rather than a partial assessment of the benefits received by a single sector.

Table 1: A selection of economic studies that deal with dryland salinity at a regional scale. Studies are categorised according to their scope (farm sector or multiple stakeholders) and type (cost only, or benefit-cost of control).

Time dimension and benchmarks for evaluation

Time is an important consideration in economic studies of salinity. Groundwater tables are rising because the hydrological system in disequilibrium and salinity will continue to grow until a new equilibrium is reached. It is also well known that it takes time for water tables to respond to changes in land management. Therefore, remedial strategies usually involve large up-front costs and a delay before any benefits are realised. In addition, and for the same reason, the area of salinity may continue to increase well after control measures have been implemented.

Given that salinity is inherently a problem of disequilibrium, it is necessary to measure benefits and/or costs relative to a benchmark situation. While studies in the literature do practice this technique, the benchmark used for the analysis is seldom referred to explicitly. This can be a source of confusion because results from studies that have used different benchmarks are not comparable. Various types of benchmark situations are possible. They include:

1. A hypothetical situation with zero salinity.
2. The current level of salinity.
3. The time path of salinity that is predicted to occur if the current level of remedial action was continued into the future (Time path 0).
4. The time path of salinity that is predicted to occur given progressive increases in the adoption of practices for controlling salinity, in the absence of any proactive policy program (Time path 1).

From the perspective of policy-making, an ex ante analysis (as opposed to an ex post analysis) is the most useful for comparing the economic worth of different strategies for controlling salinity. Ex ante analyses normally use the current level of salinity, or either of the time paths of future salinity, as a benchmark.

In addition to the four possibilities noted above, each benchmark could be applied in either a static (snapshot) or dynamic analysis. A static analysis quantifies the costs and/or benefits of a particular situation relative to a benchmark, but it does not pay any regard to the incremental changes in costs/benefits that may occur through time in the process of getting from one situation to the next. On the other hand, a dynamic analysis explicitly accounts for temporal changes.

Table 2 identifies eight possible cases (A to H), each of which differ with respect to their analytical approach (static or dynamic) and the type of benchmark used. Each case also implies a particular form of estimate derived, being either: Costs only, benefits only, or costs and benefits jointly (i.e. BCA). Cost-only estimates are applicable if the analysis does not set out to investigate the value of implementing a particular policy for controlling salinity. That is, the only factor of interest is the cost of encroaching salinity. Alternatively, if the research is aimed at evaluating a strategic policy (as distinct from the passive adoption of control measures), then benefit estimates are applicable.

The schema developed in Table 2 is a useful way of categorising economic studies that appear in the literature because each of the eight cases address a distinctly different question about salinity. These questions are outlined below:

Case A: What is (or was) the cost of salinity in a particular year relative to the hypothetical situation of zero-salinity? The cost estimates produced by Whish-Wilson and Lubulwa (1997) and Ivey ATP (1998 a,b,c) are of this type. Both studies represent an ex post analysis of salinity costs. It is important to note that "annual costs" are specific for the particular year chosen for the analysis and are not necessarily the same for future years.

Case B: What is the predicted future cost of salinity in a particular year relative to the current situation (that is, in excess of the current cost)? There does not appear to be many (any) examples of this approach in the literature, however it is a potentially useful way of demonstrating how costs are likely to grow over time.

Cases C and D: What is the gross benefit that will accrue in a particular future year from the current implementation of a new control measure or policy? Only gross benefits are estimated with this type of approach because the analysis is static, and is therefore incapable of taking account of costs that were incurred "up-front" over a number of years. The only difference between C and D is that in D, an attempt is made to allow for future changes in policy and management apart from the one currently being investigated. In other words, C uses Time path 0 as a benchmark while D uses Time path 1.

Case E: What is (or was) the cost of salinity over a period relative to the hypothetical zero-salinity situation? E differs from A in that it allows for a time path of costs as salinity develops, and consolidates them using discounting techniques. The benchmark of zero-salinity is artificial and probably unattainable, and so answers a question that is also somewhat artificial and only very loosely relevant to actual decision making. An example of this type of analysis appears in the West Australian Salinity Action Plan (State Salinity Council 1998). It is an ex post analysis, which calculates the sum of all past costs up to the present day. This assessment used land prices and the current area of secondary salinity as a means of calculating the opportunity cost of land lost to production.

In principle, the costs of salinity could be evaluated over the entire transition period starting from the time when there was no secondary salinity in the catchment to the final situation where a new equilibrium is established. While this method is feasible, none of the studies that were reviewed have taken this approach.

Case F: What is the predicted future cost of salinity over a period relative to the current situation (that is, in excess of the current cost)? This case is similar to B, except that it allows for a time path of costs as salinity develops, and consolidates them using discounting techniques. As for B, this question is not usually addressed by studies in the literature, but such an approach would be useful for demonstrating the likely future impact of salinity in today's dollars.

Cases G and H: Is a particular policy or practice economically desirable when considered over the long term? These two cases are the most comprehensive and rigorous. They are also the most difficult to conduct because they require information about future costs and benefits through time. The only difference between the two cases is that in H, an attempt is made to allow for control measures which may be adopted passively in the absence of the strategic policy being investigated. H is clearly the ideal, but extremely difficult to forecast, so that G is probably the more practical. It should be recognised, however, that G is likely to overestimate net benefits of a policy or practice if passive adoption of control measures is increasing over time anyway.

Numerous ex ante benefit-cost analyses of policies for controlling salinity can be classified as belonging to Case G or H. Examples are the studies by Gomboso et al. (1996), Greiner (1997), and Loane (1993).

Table 2: Eight possible cases which emerge from different combinations of salinity benchmarks and analytical approaches (static or dynamic).

Nature of the analytical model

Management strategies usually involve changes to farming practices which have both spatial and temporal dimensions. Therefore, regional models of dryland salinity need to be capable of analysing the net present value of alternative strategies which are specified by the type, location and timing of particular intervention measures. They also need to take into account interactions both within an individual farm and between farms.

Two main types of analytical models are commonly used by economists to investigate the ex ante benefits and costs of salinity control through time and space. The distinguishing characteristics of each of these models is described below. Further discussion can be found in Hall et al. (1995), Oram (1987), and Blyth and McCallum (1987).

• Simulation models: These models allow the analyst to examine what happens, ex ante, when a certain course of action is taken. All management scenarios are selected by the analyst rather than by the model. This type of model is useful for comparing the net present value of alternative management options that have been pre-defined by the researcher. While simulation modelling can be extremely useful, it is not always possible to identify the "best" solution. For instance, a particular control strategy may produce greater economic returns than any of the others examined but there could well be other management packages which yield a higher return. Examples of simulation models include work by Campbell (1993) and Gomboso et al. (1996).
• Optimisation models: These models seek to find the "best" strategy by solving an optimisation function subject to a given set of constraints. Unlike simulation models they solve this function endogenously, meaning that decision variables (such as area of tree planting) are selected by the model rather than being prescribed by the researcher . There are a number of optimisation techniques, each of which has certain strengths and weaknesses. They include mathematical programming models (e.g. Salerian 1989), optimal control models (e.g. Barton 1994), and spatial equilibrium models (e.g. Greiner 1997). Optimisation models are generally more complex than simulation models, but they allow the analyst to identify factors which constrain farm profit and to determine the opportunity costs of choosing strategies that are sub-optimal. On the other hand, it is not always possible to represent the desired level of detail and complexity in an optimisation model. Often, a degree of simplification of the model is necessary in order for the optimisation techniques to work successfully.

It is important to recognise that many of the strategies for addressing salinity are "lumpy" in nature rather than being "continuous". A lumpy policy is one which can only be varied in discrete amounts. An example is the implementation of an engineering solution such as pumping and drainage. A reafforestation policy is more amenable to being analysed in a continuous manner because the area of trees can be varied in continuous amounts. Optimisation models are well suited to analysing control strategies that are continuous but most do not handle lumpy policies well. Simulation models can deal with both policy types.

The link between economics and hydrology.

In evaluating the future costs of salinity, or the net benefits of control strategies, it is necessary to know what impact particular land use regimes are likely to have on water- tables and hence salinity. The level of sophistication used to obtain hydrological predictions varies widely across studies. At one extreme, future trends of salinity have been determined subjectively by relying on the opinion of experts. For example, Campbell (1993) and Salarian (1989) model the amount of recharge to be a function of the ratio of pasture to trees. At the other end of the spectrum, a more objective approach was taken by Gomboso et al. (1996). They obtain predictions from a hydrological model which was formulated using experimental data and field observations.

Studies also differ in the way that they link predictions of salinity to land-use and, in-turn, the economic component of a model. The most complex approach is to model the hydrological processes endogenously. This involves describing all the functional relationships between land-use, recharge, discharge, and farm profit (e.g. Greiner 1997). Alternatively, other studies have taken a very simplistic approach and incorporated subjective information exogenously (Burdass, Grieve and Robinson 1998). The simplistic approach may be quite satisfactory at a regional level if it is capable of describing the main consequences of different control strategies. Economists frequently use subjective information when objective data is unavailable or too costly to obtain. Furthermore, the usefulness of expert opinions can be enhanced by associating probabilities to possible outcomes.

There are a number of biophysical issues which are likely to have an important bearing on the economic evaluation of salinity and control policies. It is clear that not all of these issues have been resolved. The main issues are outlined below.

• Extent to which salinity is an externality. Economists frequently define salinity as an externality, meaning that land-holders do not take into account the full costs that their actions impose on other farmers or non-farmer groups via the effects of salt discharge on production or water quality. Externalities are of great concern to economists because they result in inefficient use of resources (see Blyth and McCallum 1987 for a theoretical explanation). A large proportion of economic studies that have been conducted at a regional level are founded on the assumption that an externality problem exists (e.g. Salerian 1989; Greiner 1997). Furthermore, many papers use the "externality argument" as justification for government to become involved in developing policies for controlling salinity.

In Western Australia, recent research has led hydrologists to question the extent to which salinity is in fact an externality (George et al. 1998). Pannell (1999) outlines several reasons why externalities are not as significant an issue in dryland salinity as they are widely believed to be (at least in Western Australia). There are both hydrological and economic reasons for this. One reason is that some catchments are shaped such that discharge occurs within the same farm as the recharge occurs. Another is the low (or at least very slow) impact of tree plantings on water table heights at any distance from the trees (George et al. 1998). This implies that the external benefits of salinity management may very small relative to the internmal benefits for a large proportion of farm land. Of course, regardless of where salinity emerges in the landscape, the public costs associated with stream salinisation remain external to the farmer's decision-making process.

• The extent to which land can be protected on-farm. Planting trees is widely advocated as the most effective way of lowering water-tables and, subsequently, of protecting adjacent land from becoming saline. However, recent research conducted in Western Australia by George et al. (1998) has found that the draw-down effect of trees on water-tables does not generally extend for more than 10 to 30 metres outside the planted area. While these results are still preliminary, they suggest a paradigm shift in the way that salinity has been previously been conceptualised and evaluated. Instead of farm forestry being viewed primarily as a means of maintaining high-value agricultural production on adjoining land, the private benefits of planting trees are more likely to arise from the direct commercial benefits of growing tree crops on land that would otherwise have become saline.

A related issue is the relationship between the area of tree planting and the amount by which water-tables can be drawn down. This relationship is not necessarily linear. In fact it may be the case that the marginal impact on the water-table per unit of trees planted may decline with increases in the area of trees planted. The exact nature of this relationship will greatly influence the marginal costs of reducing salinity by reafforestation.

• The extent to which the salinisation process can be reversed. While tree planting has been shown to be effective at lowering water-tables in some circumstances, there is no guarantee that the process of salinisation is reversible. Scenario modelling in Western Australia indicates that (on average) large-scale reafforestation will not be sufficient to reclaim land that has already become salt-affected. Rather, it is thought that salinity will continue to rise to a new equilibrium level that is lower than it would have been (Hatton, pers. comm. 1999).

One of the physical processes governing this poor outlook is hysteresis. This describes the situation whereby the initial state of the soil profile facilitates a rise in saline ground water that is much quicker than any subsequent draw down. This phenomenon occurs because rising water-tables change the physical properties of the soil profile and, consequently, reduce the ability of soils to transport water. The phenomenon of hysteresis increases the marginal cost of lowering water –tables. Furthermore, the costs of delaying the implementation of control measures will be higher under hysteresis.

An additional factor making reversal difficult or expensive is the impact that salinity has on plant growth. Once an area of land has become saline, the potential productivity of plants growing on that land is reduced, thus making it even more difficult to prevent additions to the water table.

Even if the process of salinity could be completely reversed, it is doubtful whether damage to the environment could be rectified. This is particularly true if native species of flora and fauna become extinct as a result of salinisation. The issue of irreversibility suggests that policy makers should apply the "Precautionary Principle" when assessing the merits of control strategies.

• The degree of uncertainty. The hydrological processes which underpin dryland salinity are complex and not completely understood. In particular, the geology which underlies a landscape often confounds scientist's ability to predict the location and timing of discharge areas. Owing to the uncertainty associated with physical aspects of salinity, economic estimates of costs and benefits are also uncertain and may be better expressed as ranges rather than single figures.
• The extent to which the salinisation process is stochastic. Even if the hydrological processes responsible for salinity were well understood, predictions about the area, location and timing of salinity is likely to be highly variable. This is because of variable environmental factors such as annual rainfall that are known to have major influence on recharge and, subsequently, on the emergence of salinity at the ground surface. Further discussion about incorporating rainfall variability into an economic model of dryland salinity can be found in Hall et al. (1995) and Greiner (1997).
• The relationship between plant production and the severity of salinity. In order to quantify the opportunity costs of lost production it is necessary to know how particular species of plants are affected by varying degrees of salinity. Production losses could be offset if alternative, salt-resistant species of commercial plants were available to replace traditional crops and pastures. In the absence of better information, many economic studies simply assume that salinity causes a complete loss of production. Hence land is treated as being either salt affected with zero production, or non-affected with no damage to production (Whish-Wilson and Shafron 1997). This clearly results in overestimates of the true costs of salinity.

Measurement of costs and benefits

A great deal of effort has been made in recent years to establish guidelines for measuring the costs of dryland salinity incurred by all stakeholders. In 1994 the National Dryland Salinity Program commissioned the Australian Bureau of Agricultural and Resource Economics to develop a set of guidelines for quantifying the full range of costs associated with salinity. These guidelines, which appear in Wilson (1995a), have been undergoing refinement and are due to be published in 1999. Some components of the guide have been published in Martin and Metcalfe (1998).

The guidelines identify five main types of costs:

• Repair and maintenance costs
• Costs of taking preventative action
• Shortened lifespan for structures and fixtures
• Decrease in income or benefits
• Environmental costs

While all these types of costs are relevant, care needs to be taken not to count costs twice. The guidelines fail to make clear that preventative action reduces the other costs of salinity to the extent that it is effective at controlling the process. Hence it is incorrect to add the cost of prevention to those costs which would only be incurred in the absence of prevention.

The guidelines have been applied to catchments in New South Wales and Victoria by ABARE and Ivey ATP (1998 a,b,c). These studies produce a static estimate of salinity costs imposed by the level of salinity that prevailed at the time the research was undertaken. Costs were measured relative to a benchmark situation of zero-salinity, and hence belong to Case C (see Table 2).

It is important to recognise that the estimates made by these studies are of limited use for policy making because they are specific for the particular year chosen for the analysis and will not necessarily be the same in future years. In addition, the size of costs will not necessarily rise proportionally with the level of salinity. For example, the cost of corrosion in water pipes and machinery may not rise after a certain threshold level of salt concentration has been reached. Similarly, the costs imposed on farm production are unlikely to rise linearly with increasing areas of salinity, because different parts of a farm have different levels of productivity.

While quantifying the size of costs across stakeholders is a first step towards evaluating the potential benefits that are foregone due to salinity, more information is required for making efficient policy decisions. The other information needed is:

• the direct and indirect costs of implementing control strategies, at the margin.
• the benefits of implementing control strategies, at the margin. Benefits are both a function of the size of costs imposed by salinity, and the degree of effectiveness of the strategies at reducing salinity.
• the direct commercial benefits (at the margin) from alternative forms of production that may be part of the control strategy (eg. timber production, lucerne hay, etc.).
• the timing of costs and benefits

Various methods have been used to measure the on-site and off-site costs of salinity. A discussion of these methods follows.

On-site costs incurred by primary producers

The majority of costs suffered by farmers are likely to be caused by losses in crop or pasture production, although no research has been undertaken to establish the size of costs due to damage to farm infrastructure, etc. On-site costs have been measured in a variety of ways. These include:

• the cost of repairing land to a "pristine" state
• the annual gross value of foregone production
• the value of land "lost" to salinity, or the impact of salinity on land value.
• the annual amount of foregone net income

Of these four methods, only the last two are a valid means of quantifying net economic losses. The restoration of land to pristine condition is a rather artificial target and bears no relationship to what would be regarded as an economically efficient level of control. The gross value of lost production is frequently quoted as a measure of economic cost, but it is misleading because it ignores the input costs that would have been incurred to generate that production. For example, if salinity prevents a crop from being grown, the losses to the farmer from revenue foregone are partly offset by a reduction in variable costs.

Equating costs to the value of "land lost" is conceptually correct, provided the market price of land indeed reflects the earning potential of the land, and provided the land is actually lost. Theoretically, land values should equal the discounted sum of all future net income, so future production losses from salinity should be reflected in the land price. In practice, there are various reasons why this may not occur (Blyth and McCallum 1987). In addition, saline land will seldom have no productive value. For example, it has been estimated that around half of valley floor soils likely to go saline in the wheatbelt would be suitable for saltland agronomy of moderate to high productivity (Ed Barrett-Lennard, pers. comm. 1999). Therefore, the loss of earnings due to salinity would be less than the full value of the non-saline land.

Some researchers have used a hedonic technique to derive an implicit "price" for land degradation (e.g. King and Sinden 1988). This technique estimates the relationship between land prices and land characteristics, including the extent of degradation. King and Sinden found that the severity of land degradation did in fact have a significant influence on land price, indicating that buyers do perceive the long term costs of degradation.

Equating costs to annual losses in net income is perhaps the most robust method of measurement. The ABARE study by Whish-Wilson and Shafron (1997) followed this procedure by calculating gross margins that were specific for particular enterprises and land management units. A weighted average gross margin was then calculated for each land management unit (LMU) based on the proportion of each enterprise on a given LMU. The annual cost of salinity for a particular LMU was found by multiplying the weighted gross margin by the area of salt affected land. Saline land was assumed to have no commercial value. Finally, total costs for the catchment were obtained by summing costs across all LMUs.

One strength of this approach is its ability to account for spatial differences in land productivity. This is particularly important to consider for the West Australian situation where the majority of salt discharge occurs in valley bottoms. The productivity of low-lying land is likely to be quite different to the capability of land higher in the landscape. The ABARE work also has some deficiencies, most of which are acknowledged by the authors. The main weaknesses are:

• gross margins do not take into account overhead costs. This would be problematic if the encroachment of salinity causes large adjustments in the farmers requirements for machinery and capital.
• gross margins are average values rather than marginal values. As such, using gross margins may over-estimate the cost of salinity.
• saltland is assumed to have no commercial value but, as noted above, varying degrees of production are possible off a proportion of salt-affected land. Importantly, the marginal value of saltland production may increase as the proportion of land affected by salinity increases. For example it may only become economically viable to operate a specialised "saltland farming system" once the area of salt-affected land becomes sufficiently large in size.
• the study experienced some practical difficulties obtaining production data that corresponded to the chosen set of land management units.

Increasingly, more sophisticated ways of dealing with spatial differences in land capability and productivity are being developed. In particular, Geographic Information Systems (GIS) are now being used as a framework for examining the spatial distribution of degradation costs (or the benefits of control strategies). Walpole et al. (1996) use GIS to produce a regional map of the benefit-cost ratios associated with strategies for controlling soil erosion. At a larger scale, Smyth and Young (1998) map the on-site costs of soil erosion across the whole agricultural region of NSW. To date there have been no applications of this method to dryland salinity.

It must be recognised that use of GIS, in itself, does not imply a particular approach to the economic analysis. Any of the benchmarks, economic methods and time treatments outlined above could conceivably be implemented within a GIS-based system. For instance the study by Walpole et al. used a standard benefit-cost method which could be classified as a "Case G" study using the scheme depicted in Table 2.

An article by Moxey (1996) summarises the potential strengths and shortcomings of using GIS as an analytical tool for agricultural economists. He notes that one of the strongest features of GIS is its overlaying facility. This involves combining two or more digital maps to obtain a composite map which allows overlapping attributes to be identified and categorised. Furthermore, GIS is particularly well suited for visually displaying model outputs (e.g. benefit-cost ratios) in a spatial dimension. Maps of this type show the economic consequences of policies and are a powerful way of communicating research results to non-experts. However, Moxey (1996) warns that maps can be misleading because they tend to mask the uncertainty associated with underlying data.

Off-site costs incurred by the community and non-farm businesses

Public utilities and government agencies

The two main public physical assets at risk from dryland salinity are water resources and public infrastructure such as buildings, roads and township parklands. The studies by ABARE and Ivey ATP both used surveys to estimate the amount of money spent by government agencies on repairs, maintenance, and prevention of salinity. Subjective surveys are problematic because, in many cases, respondents are unable to accurately recognise the impacts of dryland salinity and distinguish what proportion of costs are attributable to salinity.

An alternative is to collect objective information about the impacts of salinity on assets and to develop a predictive model. For instance, Lubulwa (1997) discusses a regression model developed by the Australian Mineral Development Laboratories (AMDEL) for predicting the costs caused by a unit increase in the salinity of town water. Costs were mainly related to the higher-than-normal levels of corrosion which occur in pipes and machinery as a result of salinity.

A number of studies have quantified the extent of damage caused by salinity and rising water tables to main roads and bridges (e.g. McRobert and Foley 1997). Assessing the cost of salinity damage ex post is relatively easy, but forecasting future costs is much more difficult. This task requires information about the future location, extent, and timing of salt discharge. To date there has not been any attempt to rigorously estimate future damage costs to roads etc.

In Western Australia there is concern that salinity will impinge upon the state's ability to provide a potable source of water to both urban and rural communities into the next century. Hence, there has been considerable expenditure on programs to reafforest water catchments and the construction of new dams to replace those which have become saline (e.g. as outlined in the Salinity Situation Statement published in 1996). These prevention and replacement costs serve as a reasonable measure of the economic impacts of salinity on water resources.

Non-farm businesses

There are three main groups of non-farm businesses that are likely to be affected by salinity. They are:

• Businesses supplying goods and services to farmers.
• Businesses reliant on natural areas, e.g. tourist operators, apairists.
• Rural and urban businesses directly affected by salinity, e.g. damage to infrastructure and equipment.

Surveys, once again, provide a possible means of estimating the costs to this sector but the information obtained from subjective surveys need to be treated cautiously because respondents perceptions and understanding of the problem may not always be accurate.

The magnitude of losses suffered by businesses supplying goods and services to farmers will be dictated by the extent to which farmers' demand for inputs change as a result of salinity, and the extent to which businesses in rural towns are able to source alternative markets for their products. There do not appear to be any economic studies that have attempted to measure these relationships. For businesses that are reliant upon natural areas, their costs will be determined by the extent to which they other non-degraded natural areas with otherwise similar characteristics are available.

Community values for the environment

Salinity can disrupt, degrade or destroy a range of "services" that flow from environmental resources such as native bushland, wetlands and waterways. The majority of these services are "public goods", although some accrue to private businesses (as discussed above). Examples of environmental services include:

The values attached to these types of services are often classed as being either "use" or "non-use" values. Hence an individual's willingness to pay to for the preservation of a natural area may comprise a number of components:

• direct use value (e.g. recreation)
• option value (e.g. the option to recreate at some stage in the future)
• existence value (i.e. the value that stems from knowledge that an environmental resource is in "good health")
• bequest value (i.e. the desire to preserve an environmental resource for future generations)

Reports by Treadwell and Short (1997) and Whitten and Bennett (1998) provide a good discussion of how these values relate to environmental resources at risk from salinity. They also summarise the types of methods that are available for eliciting these "non-market" values, and the limitations of each method.

There is a burgeoning literature on environmental valuation. For example, Table 3 lists eight Australian studies that have endeavoured to value wetlands and remnant vegetation using a social-survey techniques. Results from these type of surveys must always be interpreted carefully and the reader should be aware of the context in which they were derived. This is particularly true if the estimates are to be transferred from their region of origin to another region.

Table 3: Summary of value estimates for two environmental resources at risk from salinity. All values are means, unless otherwise indicated. Values are expressed in present day Australian dollars.

^* median estimate.

Conclusion

This brief review of the literature has lead to a number of observations about the quality and applicability of analytical studies that have examined dryland salinity. The main points are:

• There appears to be an undue emphasis on assessing the costs of salinity. More work needs to focus on estimating benefits and costs at the margin for different scales of remedial action.
• Very few studies extend their analysis of salinity policies to include multiple stakeholders. Further research is required to develop frameworks for assessing the full range of benefits and costs in an integrated fashion.
• Too many researchers fail to explicitly identify the benchmark against which they are comparing alternative "salinity scenarios". This leads to confusion among non-experts and decision makers because different benchmarks lead to distinctly different questions and, hence, cost (and/or) benefit estimates.
• GIS technology appears to be a promising tool for assisting with the economic evaluation of salinity policies. However, it requires a great deal of spatial information about land use and capability.

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Citation: van Bueren, M.S. and Pannell, D.J. (1999). Literature Review: Regional Economic Studies of Dryland Salinity, SEA Working Paper 99/05. http://www.general.uwa.edu.au/u/dpannell/dpap9905f.htm

SEA News issue #4

The SEA News index is at http://welcome.to/seanews

Copyright © Martin S. van Bueren and David J. Pannell 1999
Last revised: May 21, 2003.