Managing Drought Risk in the Okanagan: A Role for Dry-Year Option Contracts?

Although markets have proven effective at moving scarce water to high-value uses, the potential economic efficiency gains are often insufficient to convince water users to accept more market-oriented water allocation mechanisms. Water users in the semi-arid areas of British Columbia, including the Okanagan basin, are deeply concerned about the potential negative impacts of water markets. With drought risk rather than chronic water scarcity as the primary water management challenge, water users' concerns are reasonable. Dry-year option contracts may capture some of the benefits of market-based instruments without the risk implications of conventional water markets. Dry-year water option contracts are financial instruments that water-sensitive users can use to hedge themselves against drought impacts, and if appropriately managed through a water supplier, they may be an efficiency-enhancing alternative to crop insurance. We argue that with appropriate support, dry-year option contracts can be a useful low-cost tool to mitigate drought impacts in semi-arid regions of British Columbia. Such contracts may enable the innovative local water management solutions envisioned in British Columbia's recently enacted Water Sustainability Act.