Options for Water Trade
Submitted by Aguanomics Blog
Tomkins and Weber (I know them) discuss “Option Contracting in the California Water Market” It’s full of math and a little bit of calibration data (SDCWA and MWD water options), so download at you’re own risk!
ABSTRACT: Temporary resource transfers, as achievable under option contracts, reduce transaction cost associated with the sale of permanent resource rights. As such, they facilitate the realization of gains from trade that would go unrealized under failed permanent transfers.
In the California water sector, there has been considerable resistance to permanent water rights transfers. The advent of option trading has led to an increase in urban-agricultural water transfers and has the potential to stimulate the California water market.
This paper develops a bilateral option contracting model for water, which includes the possibility of conveyance losses and random delivery. Seller-optimal and socially optimal option contracts are characterized in terms of relevant upfront and strike prices, as well as contract volumes, from an ex-ante and an ex-post point of view.
Actual contract prices are compared to model-predicted prices, and the social welfare gains from option contracting in the California water market to date are estimated. The sensitivity of future gains to commodity prices and the cost of electricity, implying the marginal cost of water conveyance, is also discussed.
Bottom Line: The first point is the most important — water markets, rights and trades need to be flexible, to reduce the chances that either party to them will make a mistake. So can get get more of these please?
hattip to RS
We want to hear your thoughts on conservation so we make this a better world. Register on Conservation Blog now and get published within minutes. Before posting, it is recommended that you review our posting guidelines.
