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Effectiveness of weather derivatives as a cross-hedging instrument against climate change: Case studies of reservoir water allocation management in Guanajuato, Mexico

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  • Miriam Juarez-Torres

    (Department of Agricultural Economics, Texas A&M University)

Abstract

Ongoing 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 an irrigation district located in Guanajuato, Central Mexico.

Suggested Citation

  • Miriam Juarez-Torres, 2013. "Effectiveness of weather derivatives as a cross-hedging instrument against climate change: Case studies of reservoir water allocation management in Guanajuato, Mexico," Working Papers 201348, Latin American and Caribbean Environmental Economics Program, revised 2013.
    • Handle: RePEc:lae:wpaper:201348
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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O54 - Economic Development, Innovation, 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 and their Management; Global Warming

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