Optioning Water Rights: A Potential Alternative to the Hanjiang-Weihe River Water Transfer Project, China

China has started shifting from relying on supply management to demand management strategy in addressing its water shortage problems. Water option, a financial derivative for water commodity, has been utilized to manage water demands in the United States and Europe since the 1990s but is still novel...

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Bibliographic Details
Published in:Chinese geographical science 2020-12, Vol.30 (6), p.1039-1051
Main Authors: He, Xiaoying, Kang, Hong, Gu, Yaopeng, Song, Yuanliang
Format: Article
Language:English
Subjects:
Earth and Environmental Science
Geography
Options trading
Receiving waters
Rivers
Water rights
Water shortages
Water transfer
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Summary:China has started shifting from relying on supply management to demand management strategy in addressing its water shortage problems. Water option, a financial derivative for water commodity, has been utilized to manage water demands in the United States and Europe since the 1990s but is still novel to China. In this study we analyzed the pros and cons of China’s existing system for water rights transfers and proposed an alternative, flexible trading instrument-water options for China. Incorporating the uncertainty to water option pricing, this study first conducted an empirical analysis of the water option in the water-receiving area of the Hanjiang-Weihe River Transfer Project of China, and then evaluated the benefits of the water option applications. Results show that water option trading can bring water cost saving and increase the potential industrially added value for industrial enterprises in the receiving area, and trading of short-and-medium term water options is more favorable than the long-term water options trading. The novel water option trading proposed in this study, once verified through pilot studies, will be helpful in addressing water shortage problems in China.
ISSN:1002-0063
1993-064X
DOI:10.1007/s11769-020-1165-5