Consequences of Climate Change for Industry and geographical variation

2.3.1. Industry

Different agricultural sectors have differing levels of capacity to respond to fluctuations in water availability. Horticulturalists and dairy farmers must have access to water during drought; both have high capital investments, often associated with high debt that requires constant service. Annual crops, on the other hand, can reduce their water use without such dire consequences and they can be compensated by selling water to higher value producers (Bjornlund et al., 2013). Efficiency gains will be easier in a sector such as dairying, because there is currently such a variation in efficiency capabilities. However, such gains are likely to be harder to achieve in sectors with a high degree of efficiency throughout the sector; they will therefore face particular challenges if more gains are required (e.g. rice). Industries such as cotton are likely to need to substantially change the way they irrigate crops (Stubbs et al., 2010).

Rising costs of water is likely to promote an increased proportion of regular water use going to horticulture and viticulture, which are higher up the value chain. However, in those sectors where water is a much larger proportion of costs, and the return per unit of water is lower such as rice and cotton, productivity will suffer. A shortage of water might lead to some industries moving to a dry-land model to free up water for industries in which water is essential, such as perennial crops. Dairy farmers, for example, may curtail irrigation and substitute it by buying in fodder. Such developments are likely to drive closer links between irrigated and dry-land agriculture (Stubbs et al., 2010).

Modelling by Quiggin et al. (2010) predicts increasing salinity will initially lead to a transition away from stone fruits to grapes, with no stone fruit being produced in the sMDB by 2030 (Goesch et al., 2009). This will be followed by a transition away from grapes toward citrus as salinity continues to increase. By 2050, the area devoted to grapes is estimated to decline by around seven per cent while the area devoted to citrus is estimated to increase by around 30 per cent (Goesch et al., 2009).

Quiggin et al. (2010) found that water availability in the MDB would be significantly reduced in the future. In regard to this finding, adaptation is found to be a useful and effective response in the middle-term (until 2050). In the far future adaptation alone may not be a sustainable response due to further inflow reduction projections. A complementary effect between adaptation and mitigation is expected.

Quiggin et al. (2010) also found that under some climate change scenarios the Darling River system may eventually develop into a disconnected system (i.e. no longer contribute to the Murray River flows and trade), meaning that irrigated agriculture therefore could not be practiced sustainably. Using a state-contingent analysis they found that: i) costs of securing a constant water supply, e.g. for horticultural crops, are seen to increase; ii) opportunity cropping without irrigation

during droughts will be more prevalent in the future; iii) a further response to climate change and severe droughts in agriculture is likely to be limiting irrigation to only the most critical areas; iv) crop changes will be more common; and v) shifts from high water consuming production of citrus and grapes to less demanding vegetables such as tomatoes or rockmelons are expected.

2.3.2. Location

The geographic location of production may shift as a result of climate change. Hotter temperatures are likely to have a southward drive, while a desire to minimize evaporation losses will tend to push production up the Basin. Reduced water availability will tend to shift production away from areas of heavy flood soils to areas of lighter dry soils, a process that will be facilitated by the development of suitable water application technology (Stubbs et al., 2010). The production of certain commodities will cease in some areas and be replaced with new ones. This would have significant consequences for specific agricultural sectors and regional economies, such as:

 Viticulture could move to areas previously considered too cool, notably southern Victoria and Tasmania.

 Dairy production in southern Victoria and Tasmania could expand at the expense of dairying in the sMDB.

 Cereal crops may be grown in areas previously deemed too cool or wet.  Wine grape varieties developed to suit particular areas could be adversely

affected by higher temperatures and extreme weather (frosts and heatwaves).  As a consequence of higher summer temperatures and less winter chill some

areas currently producing stone fruits might not be able to continue to do so in the longer term.

 Higher temperatures in MDB dairying areas are likely to create stress for livestock and higher energy demand for cooling production sheds (NWC, 2012b).

2.3.3. Costs

Reduced runoff will lead to less secure entitlements for irrigators and could shrink the size of the irrigation sector and change the mix of permanent and annual crops grown. This could lead to rural water supply networks being less well utilized, increasing the cost of supply or reducing the viability of supply to a contracting customer base (NWC, 2012b). The NWC also suggests that the increased water costs resulting from the generally increasing price of electricity generation will be limited—because energy is a relatively small cost for most businesses, in terms of overall cost. However, the Renmark Irrigation Trust suggests otherwise. They argue that they are already facing a 27% increase in electricity prices. This will increase further under the introduction of the carbon tax, with the increase in costs flowing through to individual irrigators (ABC News, 2012a).

Salinity may also pose a serious, albeit less recognized, cost hazard. It is estimated that globally about 1/3rd of irrigated land is effected by salinity; adding extra irrigation water is usually regarded as the best solution (Connor et al., 2012). Climate change is likely to make the issue of salinity worse, while reducing traditional ways of dealing with it. Climate change impacts on salinity are expected to occur in two ways: i) the first is decreased salt loads from less drainage; and ii) increased salt concentrations from reduced flows. Reduced flows, however, have the greatest impacts (Connor et al., 2012). Increases in salinity are likely to be proportionately greater in downstream

sections of the river. Irrigators’ incomes can also be affected by changes in salinity (Goesch et al., 2009). Connor et al. (2012) conclude that increasing variability in supply is likely to drive up irrigator costs in excess of those associated with lower overall flows. This is likely due to increased variability leading to increased opportunistic cropping that requires leaving irrigation assets idle during periods of low water availability. Further, during drought irrigators employ 'deficit irrigation', which leads to reduced productivity even while fixed costs remain the same (Connor et al., 2012). Increased variability of supply is likely to pose particular challenges for those growing perennial rather than annual crops (Connor et al., 2012).

2.4. Key points

The major points from this section include:

 Irrigation accounts for approximately 70% of total water withdrawals worldwide and for more than 90% of consumptive water use. Irrigation also generates about 40% of total agricultural output, yet irrigated land only represents 18% of global agricultural land.

 Australia is likely to be more affected by climate change than any other country, and agriculture is likely to be more adversely affected of any sector with a projected decline of 17% in productivity by 2050, with corresponding influences on farm profitability.

 The Millennium drought caused a 70% reduction in irrigation water use in the 2000s. However, the gross value of irrigated agricultural produce fell only by 14%, indicating that irrigation productivity can adapt in periods of crisis, but future water supply and use efficiency will become more important.

 Adaptation is adjustments in human-environmental systems in response to observed or expected climatic changes. Transformation adaptation signifies a major change in livelihood, location or identity (e.g. farm exit, sell all water and go dry-land) while incremental adaptation is more related to the adoption of actions that do not require major decisions or information to adopt (e.g. adopt irrigation infrastructure, buy more water/land, diversify).

 Barriers to adaptation include uncertainty, lack of market signals, financial factors, information barriers, cognitive barriers, climate change beliefs, and disincentives to change or adapt.

 Costs of climate change will include rising energy costs, more frequent droughts (hence loss of production), increased salinity, reduced water availability.

3. AN INTRODUCTION TO WATER MARKETS