Effectiveness of Weather Derivatives as a Cross-Hedging Instrument against Climate Change: The Cases of Reservoir Water Allocation Management in Guanajuato, Mexico and Lambayeque, Peru
AbstractOngoing climate change will increase competition for water. Diversified demand for water—in contrast with the rigid design of water systems, institutions and infrastructure—could hinder the implementation of adaptation policies in water management for Latin American countries. In this context, weather derivatives are proposed as a complementary mechanism for the successful adoption of more efficient water allocations in irrigation districts. Weather derivatives spread risks and incorporate a better understanding of climate system behavior, strengthening irrigation districts’ ability to deal with water availability and demand. The model uses a dynamic water resource allocation model, historical precipitation and Intergovernmental Panel on Climate Change (IPCC) scenarios to find optimal water allocation strategies for the baseline scenario and in the presence of climate change. This analysis is applied to two irrigation districts in Latin America: one in Mexico and the other in Peru, with their corresponding particularities and results.
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Bibliographic InfoPaper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4793.
Date of creation: Aug 2012
Date of revision:
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
- O54 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
- Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
- Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-20 (All new papers)
- NEP-ENV-2012-10-20 (Environmental Economics)
- NEP-LAM-2012-10-20 (Central & South America)
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