How Well Do U.S. Western Water Markets Convey Economic Information?

Rimsaite, Renata; Fisher‐Vanden, Karen; Olmstead, Sheila M.; Grogan, Danielle S.

doi:10.3368/wple.97.1.1

Cited by 7 publications

(7 citation statements)

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“…We contribute to the literature in at least three ways. First, to our knowledge, this is the first study on the futures derivatives market of water, which complements the previous research on spot water markets (e.g., Garrick et al, 2020; Pullen & Colby, 2008; Rimsaite et al, 2021). Second, this is also the first study examining a cash‐settled index futures contract on natural resource commodities.…”

supporting

confidence: 56%

Why is water illiquid?: The NQH2O water index futures

Wang

2022

Applied Eco Perspectives Pol

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The newly launched water futures market faces a serious illiquidity problem with scarce trading volume. We examine the causes of the illiquidity based on the futures contract design literature and empirical analysis of spot water markets in the western United States. The primary cause of illiquidity is a lack of effective hedging demand for water futures due to the heterogeneity and limited size of spot water markets. The opaqueness of the water futures settlement index further deters the participation of traders. Moreover, the lack of public information on spot water market transactions also reduces its attraction to speculators.

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supporting

confidence: 56%

Why is water illiquid?: The NQH2O water index futures

Wang

2022

Applied Eco Perspectives Pol

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“…The high cost of water motivates the need for developing a more flexible approach for managing drought‐related shortfall risks within the C‐BT. Evidence suggests that more active leasing markets in Colorado, particularly during dry periods, could relieve some of this pressure on the price of permanent C‐BT shares (Rimsaite et al., 2021; Taylor et al., 1993). As proposed here, financial contracts that can facilitate responsive informal leases would enable the C‐BT project, which serves mostly high‐value urban activities, to quickly augment its supply of water from the UCRB, providing flexibility during times of severe drought.…”

Section: Methodsmentioning

confidence: 99%

Using Financial Contracts to Facilitate Informal Leases Within a Western United States Water Market Based on Prior Appropriation

Zeff,

Hadjimichael,

Reed

et al. 2024

Earth's Future

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The ability to reallocate water to higher‐value uses during drought is an increasingly important “soft‐path” tool for managing water resources in an uncertain future. In most of the Western United States, state‐level water market institutions that enable reallocation also impose substantial transaction costs on market participants related to regulatory approval and litigation. These transaction costs can be prohibitive for many participants in terms of both costs and lengthy approval periods, limiting transfers and reducing allocation efficiency, particularly during drought crises periods. This manuscript describes a mechanism to reduce transaction costs by adapting an existing form of informal leases to facilitate quicker and less expensive transfers among market participants. Instead of navigating the formal approval process to lease a water right, informal leases are financial contracts for conservation that enable more junior holders of existing rights to divert water during drought, thereby allowing the formal transfer approval process to be bypassed. The informal leasing approach is tested in the Upper Colorado River Basin, where drought and institutional barriers to transfers lead to frequent shortages for urban rights holders along Colorado's Front Range. Informal leases are facilitated via option contracts that include adaptive triggers and that define volumes of additional, compensatory, releases designed to mitigate impacts to instream flows and third parties. Results suggest that more rapid reallocation of water via informal leases could have resulted in up to $222 million in additional benefits for urban rights holders during the historical period 1950–2013.

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“…Transaction costs are particularly high for leases in Colorado, making it stand out among water-stressed neighboring states as having a relatively low level of leasing activity (Howitt and Hansen, 2005;Womble and Hanemann, 2020a). More active leasing markets have the potential to generate significant economic benefits (Michelsen and Young, 1993;Rimsaite et al, 2021), particularly during droughts when the losses from inefficient allocation are most acutely felt, suggesting that there is ample motivation for finding new approaches that reduce leasing-related transaction costs. Given the challenges associated with changing existing institutions, however, new approaches that could operate within existing institutions are likely to be more attractive.…”

Section: Introductionmentioning

confidence: 99%

Using financial contracts to facilitate informal leases within a Western United States water market based on prior appropriation

Zeff

Hadjimichael

Reed

et al. 2023

Preprint

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The ability to reallocate water to higher-value uses during drought is an increasingly important ‘soft-path’ tool for managing water resources in an uncertain future. In most of the Western United States, state-level water market institutions that enable reallocation also impose substantial transaction costs on market participants related to regulatory approval and litigation. These transaction costs can be prohibitive for many participants in terms of both costs and lengthy approval periods, limiting transfers and reducing allocation efficiency, particularly during drought crises periods. This manuscript describes a mechanism to reduce transaction costs by adapting an existing form of informal leases to facilitate quicker and less expensive transfers among market participants. Instead of navigating the formal approval process to lease a water right, informal leases are financial contracts for conservation that enable more junior holders of existing rights to divert water during drought, thereby allowing the formal transfer approval process to be bypassed. The informal leasing approach is tested in the Upper Colorado River Basin (UCRB), where drought and institutional barriers to transfers lead to frequent shortages for urban rights holders along Colorado’s Front Range. Informal leases are facilitated via option contracts that include adaptive triggers and that define volumes of additional, compensatory, releases designed to mitigate impacts to instream flows and third parties. Results suggest that more rapid reallocation of water via informal leases could have resulted in up to $222 million in additional benefits for urban rights holders during the historical period 1950 – 2013.

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How Well Do U.S. Western Water Markets Convey Economic Information?

Cited by 7 publications

References 0 publications

Why is water illiquid?: The NQH2O water index futures

Why is water illiquid?: The NQH2O water index futures

Using Financial Contracts to Facilitate Informal Leases Within a Western United States Water Market Based on Prior Appropriation

Using financial contracts to facilitate informal leases within a Western United States water market based on prior appropriation

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