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

Miriam Juarez

No 201348, Working Papers from Latin American and Caribbean Environmental Economics Program

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.

Pages: 59 pages
Date: 2013, Revised 2013
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Related works:
Journal Article: Weather Derivatives and Water Management in Developing Countries: An Application for an Irrigation District in Central Mexico (2017)
Working Paper: Effectiveness of Weather Derivatives as Cross-Hedging Instrument against Climate Change: The Cases of Reservoir Water Allocation Management in Guanajuato, Mexico (2012)
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