• water trade;
  • options contracts;
  • supply uncertainty
  • Q25;
  • Q29

Climate change predictions include forecasts of higher variability in rainfall and river flows leading to greater uncertainty about future availability of water across urban and agricultural sectors. Under conditions of water scarcity, it makes economic sense to facilitate the transfer of water from low- to high-value users. This paper provides insights into the merits of water options contracts as a vehicle for facilitating trade and represents an alternative to the politically contentious permanent sale of water by agriculturalists. In addition, we provide some indicative results from an analysis of the feasibility of options contracts in an inter-sectoral setting by considering their deployment to remove urban/industrial water restrictions. A case study of the urban community of Wangaratta and upstream agricultural interests has been selected. The objective is to identify the conditions under which option contracts might work and to highlight the important contract design features that need to be considered.