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Key departmental publications, e.g. annual reports, budget papers and program guidelines are available in our online archive.

Much of the material listed on these archived web pages has been superseded, or served a particular purpose at a particular time. It may contain references to activities or policies that have no current application. Many archived documents may link to web pages that have moved or no longer exist, or may refer to other documents that are no longer available.

Subsidies to the Use of Natural Resources

Environmental Economics Research Paper No.2
This report was prepared by a consultant,
the National Institute of Economic an Industry Research (NIEIR),
for the Department of the Environment, Sport and Territories.
Commonwealth of Australia, 1996
ISBN 0 642 24864 8

4. Waste water treatment and disposal

4.1 Introduction

Water borne effluents from a range of activities are disposed onto land and into streams and oceans via various sewerage and drainage systems. Treatment of these wastes ranges from considerable in the case of some liquid industrial wastes and sewage to zero or negligible in the case of rainwater run-off into drainage systems, farm wastes and some rural sewerage systems.

Institutionally, waste water treatment and disposal systems are generally operated by agencies responsible for water supply and distribution, and many of the issues are similar to those discussed in the preceding water chapter of this report.

Most Australian urban areas have separate drainage and sewer systems. Surface contaminants are carried into drainage systems which eventually flow or filter into streams and oceans. In sewerage systems, even where satisfactory treatment is provided, problems can arise due to system leakage. Also the illegal connection of roof drainage water causes overflows of untreated sewage when design capacities are exceeded. Significant problems maybe experienced with surcharging and overflow of sewers in wet weather. Despite licencing and other regulatory requirements, industrial effluents mainly from urban areas continue to be disposed of into drainage systems. These effluents can cause considerable reductions in water (streams, oceans) and are often referred to in environmental protection agency annual reports.(see Note 1 below)

In rural areas nutrients, herbicides (see Chapter 8) and other contaminants from farming and other rural activities and effluents from town sewerage systems enter streams through drainage systems.

Impaired water quality in streams and in sea water, due to inadequate treatment of wastewater and excessive flows into streams and oceans, is a major environmental problem in Australia, leading among other things to high coliform counts, sea-grass die-back and algae blooms.(see Note 2 below) Testing at a range of sites often shows water quality below acceptable levels. For example, surveys over 1991–93 indicated that two-thirds of rural Victorians drink water of unacceptable quality.(see Note 3 below)

1 See for example, Victorian EPA Annual Report, p.13 and p.32.
2 See also Our Sea, Our Future, Major findings of the State of the Marine Environment Report for Australia (SOMER), DEST, 1995, pp.10–12, pp.55–64 and p.69.
3 Rural Drinking Water Quality: Summary report, Departments of Conservation and Natural Resources, and Health and Community Services, July, 1994, p.3.

Blue-green algae: a complex environmental problem(see note1 below)

Toxic blue-green algae blooms in inland waters are causing increased concern in Australia. In October 1991 algae blooms were observed over a 1000 km stretch of the Barwon–Darling River systems; at the time it was the world’s largest recorded riverine algae bloom.

Numerous factors contributing to algae blooms have been identified by ongoing research. Physical factors include temperature, evaporation, light attenuation, turbidity, colour, turbulence, flow, flooding, thermal stratification, depth and morphology of water bodies, and sediment. Chemical factors include nutrients, micronutrients, pH/carbon dioxide, organics, salinity and dissolved oxygen. The biological factors include biological interactions, zooplankton, fish and nutrient regeneration, phytoplankton succession and the effects of other microorganisms on blue-green algae.

Thus although nutrient run-off from fertilisers, farm and household wastes, sewerage plants, etc., into inland waters is cited as the main cause of algal blooms many factors are involved in the formation, severity and extensiveness of the phenomenon. Enviromental problems arise because blooms impair water quality for humans, livestock and wildlife, and also significantly reduce the tourism attractiveness of inland waters. Precise impacts, however, have not been quantified. Measurement techniques are improving, control costs are being developed and some estimates of damage costs (livestock, tourism losses etc.) are being attempted.(see note 2 below)

Strategies to abate algae bloom problems fall into three main categories:

  • managing algae bloom impacts;
  • managing water flows; and
  • managing nutrient contributions.

In each of these areas, and in an integrated approach, policy instruments such as regulation, pricing and tradable permits are being evaluated. Algae management strategies are being developed, for example, in the Murray-Darling Basin and the Peel-Harvey River region of Western Australia.

The development of an effective approach to blue-green algae problem involves, among other things, the examination of financial subsidies and environmental externalities mainly in the agricultural, water and waste water areas. Despite increasing efforts to understand and resolve the problem, it is apparent that a solution which balances environmental, economic and social concerns will take some time to develop.

1 See, for example, Algae Management Strategy for the Murray–Darling Basin, Murray–Darling Basin,Ministerial Council, August, 1993 and Young, D.,, An economic perspective on the management of the occurrences of blue-green algae, ABARE Outlook 93,Canberra,1993.
2 See, for example, Algal Management Strategy for the Murray–Darling Basin,op.cit., p.6.

Water quality problems are being addressed by a range of initiatives, for example in the Sydney area by the extensive Clean Water Program, but many problems remain. Trade waste agreements with individual businesses, e.g. by the Sydney Water Board, Melbourne Water and the State EPAs, also appear to be reducing environmental subsidies in water systems (see note 1 Below).

Breaches of guidelines, however, remain common. For example, the 1993–94 Annual Report of the Victorian EPA reports that guidelines for pollutants were often exceeded around Melbourne including for lead, cadmium, and phosphorus. Also guidelines ha ve not been set for some areas of public concern such as water clarity.

A National Water Quality Management Strategy (see note 2 below) (NWQMS) has as its aim to pursue the sustainable use of the nation’s water resources by protecting and enhancing their quality while maintaining economic and social development. This strategy is developing a nationally consistent approach to water quality management through guidelines for the man-agement of water quality. In this work both technical and policy guidelines are being developed which in the future are likely to impact on subsidies to the use of water and related resources by:

It may be some time, however, before these guidelines and work of the National Environmental Protection Council (NEPC) as described in Chapter 1, translate into policies and practices. For example, the development of national standards which reduce the substantial water and waste water subsidies identified in this report.

The NWQMS envisages that for achievement of sustainable water quality management there is need to use both market-based and regulatory approaches. The strategy points to the use of economic instruments such as full cost pricing and trading in effluent permits to internalise costs and provide incentives for decision makers to modify their behaviour in a way that leads to more socially acceptable outcomes than would occur in the absence of those incentives. It points out that regulatory mechanisms such as waste release regulations impose barriers to the use of some resource uses and waste disposal options, whereas market-based instruments generally permit selection of the most cost-effective options.

Recognition is given in the NWQMS to the particular problems of diffuse (difficult to pin-point) sources of pollution. Diffuse sources of pollution occur in both rural and urban environments. However, the potential for this form of pollution is greatest in rural areas and a range of measures will be required for its control. These measures could include identification of current contributors and decisions on the need for changed land uses and improved management practices.

Also recognised is that the application of the adopted policy principles encompass the entire water cycle. To be effective, all those individuals, groups and organisations whose activities have the potential to impact at any point along that chain, must be brought within the scope of the management process. For example, alternative waste water disposal methods, e.g. use of nutrient rich liquid wastes for agricultural, horticultural and forestry purposes, appear to have significant potential but are currently under-utilised in Australia. Realisation of these opportunities would allow profitable internalisation of environmental externalities. Some projects are underway in this area, e.g. in Sydney (under the Clean Water Program), Melbourne, Adelaide, Perth and some rural areas.

1 See James, op.cit., pp.37–42.
2 National Water Quality Management Strategy, Policies and Principles: A Reference Document, April 1994.

Despite progress in waste water management itis apparent that contamination prevention in waste water and its treatment and disposal is currently significantly less than that required to meet environmental standards and expectations. Policy issues to be addressed include identifying the sources of contaminants, the costs of treatment and disposal, and the evaluation of options for preventing and reducing contamination.


4.2 Financial subsidies

Financial subsidies to water contamination accrue from non-recovery of costs by public sewerage and drainage authorities, and from fiscal practices which encourage, or do not discourage, liquid waste production. As with water supply, charges tend not to be based on use although the trend is towards use based systems, for example in the licensing for trade wastes based on pollutant loads.(See Note 1 below)

However, user charges are not as readily specified as for water supply, and in urban areas compulsory connection to the sewerage system for a flat compulsory charge or hypothecated tax, is likely to remain the main mode of provision for most properties.(see Note 2 below)

Because waste water activities generally form part of water agency operations the financial subsidies of the two activities are difficult to disentangle. Where this is possible indications are that rates of return are low, particularly in rural areas (see Chapter 3). For metropolitan areas data is available from the Australian Resource Management Committee of Australia and New Zealand (ARMCANZ). This data is presented in Table 12, and shows that in 1993–94 only Melbourne Water had a real rate of return on its wastewater operations above 8 per cent (with revenue about 60 percent from hypothecated taxes), with the rest surveyed being below 5 per cent. Comparison of data in Tables 10 and 12 reveals that estimated rates of return for waste water activities are often higher than those for water activities, but like water if an 8 per cent real rate of return criterion is used, financial subsidies are substantial.

Financial subsidies to waste water activities are included in those estimated for water (see Chapter 3).


4.3 Environmental subsidies

Environmental externalities associated with waste water disposal lead to costs associated with impaired water quality effects on animals, fish, shell fish, human health and tourism. These costs of environmental damage are difficult to estimate but the negative impacts on biodiversity, current and future productivity, etc. are evident.

The Australian Water Resources Council (AWRC) has estimated that new investment of over $2.5 billion is required for urban sewerage treatment assets to provide limited improvements in nutrient removal.(see note 3 below) The 1990 AWRC survey also indicated that major water and sewerage authorities planned to spend $500 million in capital works between 1989–90 and 1998–99, i.e. only about 20 percent of the amount estimated to be required.

1 See for example, James, D., op. cit., particularly Appendix 1.
2 In 1995, however, Melbourne water authorities, for example Yarra Valley Water, introduced user charges to partly pay for sewerage disposal. These charges are based on winter (mainly sewerage) water use.
3 See Industry Commission, Water resources and wastewater disposal, Report No. 25, 1992, p.153.

This information can be used to provide order of magnitude estimates of costs of controlling currently untreated sewerage effluents, i.e. non-internalised sewerage externalities. At an 8 per cent real return on the additional $2.5 billion
of assets, and operating costs of these facilities estimated by the AWRC to be about
$800 million per year, the value of these externalities would be about $1.050 billion per year. As indicated above, however, this would be a low estimate because this expenditure would only provide limited improvements.

The Sydney Clean Water Program
The Sydney region Clean Water Program(CWP) has developed a range of future options for reducing negative externalities of wastewater disposal in that region. This work is useful for preparing control cost estimates of wastewater externalities in Australia.

The CWP aims to improve marine and inland water quality, reduce odours and restore bush and wetland in the Sydney, Illawarra and Blue Mountains region of New South Wales. In economic terms the program aims to internalise a range of externalities associated with water, waste water and other natural resource activities in the Sydney region. The program was established in 1989, with a planned expenditure of about $7 billion over 20 years— the largest environmental improvement pro-gram ever developed in Australia. It is administered by the Sydney Water Corporation (previously the Water Board for Sydney, Illawarra and the Blue Mountains).


Table 12 ARMCANZ 1993–94 survey: key outcomes for metropoltian sewerage (preliminary)

image: table 12

A Special Environment Levy (SEL) provided significant funding for projects identified as being urgently needed to mitigate environmental problems such as raw sewage disposal. The SEL, designed to apply for five years and raise $485 million over the period, was levied at $80per household per year, and indicated a significant willingness of Sydney region residents to pay for amelioration of water quality and other environmental problems. The water authority’s 1993–94 pricing package, as determined by the New South Wales Government Pricing Tribunal, includes a much greater emphasis on water usage pricing. Under this package, the SEL ceased on 1 January 1994, but the CWP is to continue with funding from the Corporation’s general revenues. The flat rate of the SEL and the ongoing funding of the CWP from general revenues represent cross-subsidies to higher water polluters from lower water polluters.

Details of 1991–92 and the SEL five year budget are set out in Table 13; about half of CWP expenditures came from the SEL from 1990 to1993.

Since its commencement to the end of 1992/93, the Clean Waterways Program spent $867 million, including $728 million on capital works of which the SEL contributed $206 million. The SEL also contributed $139 million towards operating costs. In the 1992–93 financial year, $269 million was spent on the CWP; the SEL contributed $106 million, including $61 million towards capital funds and $45 million towards operating funds.


Table 13 Objectives, budget and expenditure for the SEL

image: table 13

Achievements of the program to date include:

Control cost estimates
Options for future work on improving environmental performance in the Water Board’s jurisdiction are being analysed. Preliminary results of this work indicate present worth values (1994 dollars), at 8 per cent real for construction costs plus 20 years of operating expenditures, of:

Depending on the way the options are finally mixed in accordance with customer and regulatory requirements, but netting out any double-counting, the Water Board estimates that the total cost of solutions range from around $2 billion to $19 billion (1994 dollars). These values give control cost estimates of current wastewater externalities in the Sydney region if it is assumed that ongoing, planned expenditures just offset the growth in wastewater externalities.

The higher values provide a better estimate of wastewater externalities in the Sydney region as the lower costs are associated with options with very limited internalisation of the externalities.

This costing of options to reduce waste water externalities appears to be the most comprehensive costing exercise thus far conducted in Australia and can be used to provide an order of magnitude estimate of these externalities for all of Australia. If the CWP estimates were extrapolated to the whole of Australia the annual control costs for internalising wastewater externalities in Australia would be about $3.5 billion in 1994 or a total of at least $35billion in total control expenditures. This extrapolation assumes that the Sydney region’s wastewater environmental problems are somewhat more severe than in the rest of Australia and would account for about 50 per cent of total Australian control costs. That is, the limited information available suggests that the Sydney region’s waste water problems are somewhat more severe than other population centres and thus warrant a higher weighting than that given on a population share (35–40per cent) basis.

This assumption and the reliance on estimates for the Sydney region alone indicate that this estimate must be used with caution. However, given the lack of cost estimates of waste water externalities in other States and the reports of water quality problems in State EPA and other reports, this seems to be a reasonable estimate.

4.4 Summary

This review has indicated that waste water treatment and disposal in Australia involves some financial subsidies and probably very substantial environmental subsidies. This appears to be a priority area for detailed examination and analysis, including the assessment of options for subsidy removal such as improved pricing and effluent re-use. A summary of financial and environmental subsidies in waste water treatment and disposal activities is provided in Table 14.


Table 14: Summary of financial and environmental subsidies,1994, waste water treatment and disposal activities

image: table 14

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