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An Innovative Option Contract for Allocating Water in Inter-Basin Transfers: the Case of the Tagus-Segura Transfer in Spain

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The Tagus-Segura Transfer (TST), the largest water infrastructure in Spain, connects the Tagus basin’s headwaters and the Segura basin, one of the most water-stressed areas in Europe. The need to increase the minimum environmental flows in the Tagus River and to meet new urban demands has lead to the redefinition of the TST’s management rules, what will cause a reduction of transferable volumes to the Segura basin. After evaluating the effects of this change in the whole Tagus-Segura system, focusing on the availability of irrigation water in the Segura, the environmental flows in the Tagus and the economic impacts on both basins; we propose an innovative two-tranche option contract that could reduce the negative impacts of the modification of the Transfer’s management rule, and represents an institutional innovation with respect to previous inter-basin water trading. We evaluate this contract with respect to spot and non-market scenarios. Results show that the proposed contract would reduce the impact of a change in the transfer’s management rule on water availability in the recipient area.

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  1. The high water values in the Segura are, in part, due to the concentration of horticultural crops and greenhouses, and also to the widespread modernization of irrigation systems (Calatrava and Martínez-Granados 2012). The agricultural sector that depends on the transferred volumes from the Tagus basin generates 1268 € million to the GDP of the Segura basin (PwC 2013). The cancellation of the TST would lead to a reduction of the GDP close to 7.1 % (Sancho 2008).

  2. Water stock in the E-B reservoir <550 million m3.

  3. The inflows during these months are taken into account for the option contract model as the buyer has to decide whether to purchase the water or not at the end of May.

  4. \( {\tilde{S}}_t \) : Discrete function fitted using historical data (1991–2010).

  5. ΔĨ J − M : Follows an Inverse Gauss pdf (p value: 0.6444). Distribution function fitted using historical data (1991–2010)

  6. Ũ t : Follows an extreme value pdf (p value: 0.7358). Distribution function fitted using historical data (1987–2010).


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This study has been developed in the framework of the European project ‘Water Markets Scenarios for Southern Europe: new solutions for coping with water scarcity and drought risk?’ WATER CAP & TRADE (ERA-Net, P100220C-631).

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Correspondence to Dolores Rey.

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Rey, D., Garrido, A. & Calatrava, J. An Innovative Option Contract for Allocating Water in Inter-Basin Transfers: the Case of the Tagus-Segura Transfer in Spain. Water Resour Manage 30, 1165–1182 (2016).

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