CME Group Water Contract Commentary
The rewarding excellence and punishing inferiority function are set with the following rules. Third, when the quality of water reaches a certain level, there will be no significant change in its marginal utility when the quality of water keeps increasing, so the reward function should set a highest value. Referring the thought of Zhang and Wu [ 37 ] and the analysis above, this paper establishes the rewarding excellence and punishing inferiority function as given by Equation 9 and Figure 3.
The certain value of c can be determined by the two parts in different transactions on considering the detailed usage of water resources and other matters.
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The higher c means a higher incentives mechanism, and the transferee needs water with higher practical value. The sensitivity analysis of the different values c is shown in Appendix A. With the rewarding excellence and punishing inferiority function 9 , the SW measurement model of water rights trading is constructed as in Equation 10 :.
Both of them belong to the Qiantang River Basin and are located in the upper reaches of Jinhua River, an important tributary of the Qiantang River. Compared with Yiwu City, Dongyang City is richer in water resources. Besides the Nanjiang river and other abundant streams, there are two large reservoirs in Dongyang City, the Hengjin Reservoir and Nanjiang Reservoir. For Yiwu City, though it is a famous commodity production base in China with a high GDP, the shortage of water resources seriously restricts its sustainable economic and social development.
The socio-economic and water resources status of the two cities in is summarized in Table 2. The socio-economic and water resources status of Dongyang City and Yiwu City in Due to the drought, Yiwu City has suffered from water crises several times, but the adjacent Dongyang City has relatively abundant water resources.
In and , under the coordination of higher government, Dongyang City provided more than 2 million m 3 of high-quality water resources to Yiwu City twice. In order to take a long-term view, Yiwu City put forward the idea of trans-regional water diversion from Dongyang City. After negotiation, the two cities formed a water rights transfer agreement in Dongyang City on November 24th, The core content of the water rights transaction contract is that Yiwu City would invest million CNY to purchase the permanent right to use A schematic diagram of the transaction is shown in Figure 4.
Secondly, it forced the Chinese government to introduce water rights trading policies.
Thirdly, it provided a reference for improving the efficiency of water resources utilization. However, due to the fact it is the first water rights transaction practice carried out in China, both parties of the transaction lack any experience for reference. To reflect the applicability of the model, this paper stipulates the exchanged water quality is in Class II to Class V rather than in Class I as the contract requires, and measures its SW.
Based on the shadow price measurement model of equations 1 and 2 , the shadow price of the transferee Yiwu City can be obtained. Due to the similar situation of Yiwu City and the whole Yangtze River Basin, the calculation process of shadow price can be referenced according to Liu and Zou [ 47 ]. The process of shadow price calculation is shown in Appendix A.
For the usage of the exchanged water, this paper uses the industry shadow price to obtain the original value. Using the procedures given in Appendix A. For the water quantity in the contract W C o n t r a c t of As the original value of water resources is the value of the water itself, and the embodiment of its owner in economy. For industrial, agricultural and domestic water use, the direct value of water resources to users is the marginal value of the product [ 52 ].
For the water ecological value development stage coefficient l , according to the statistical yearbook and water resources bulletin of Yiwu City and Zhejiang Province, the Engel coefficient E of Yiwu City was Hence, according to Equation 6 the water scarcity index S W was 1. Combined with revenue data of waterworks, the water price of waterworks at that time was 1. The practical value of the exchanged water in different water quality classes million CNY.
The measurement of practical value is a reflection of the relative scarcity and ecological value of water resources. The scarcity of resources is one of the fundamental problems that the water rights can be exchanged and an important factor must be considered in commodity exchange [ 53 , 54 ]. Areas with higher relative scarcity have higher willingness to purchase water rights.
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Moreover, water resources in the same quality have higher utility for water-deficient areas. The ecological value of water resources can not only reflect the environmental quality of water resources, but also reflect the availability of water resources [ 55 ]. Due to the different environmental conditions of water pollution in different places, the water quality of the exchanged water is also different. In addition, water rights transaction promotes the conversion of water resources between the transferor and transferee.
The increase or decrease of water resources as well as the development and utilization of water resources have a certain impact on the ecosystem of the region where both parties are located. To reflect such impact in the transaction process, the water ecological value generated by the underlying transaction water needs to be measured. In a certain year, the water ecological value development stage coefficient and water scarcity index of the transferee are determined values, the economic profits or costs are related to the water quality.
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The results show that practical value will be obviously changed when the water quality is different from the contract. According to Equation 4 , when the transactions are executed during different periods, the social, economic and water scarcity situation will also have changed, so the practical value will change accordingly. According to Equation 9 and Table 3 , with the I j O r i g i n a l obtained in 3. Combined the calculation above and Equation 10 , the corresponding SW in different water classes will be obtained, as listed in Table 5.
The rewarding or punishing coefficient is related to the original value and practical value of the exchanged water. In this case, when the quality of exchanged water becomes worse, the quantity will be reduced as a punishment. In addition, the practical value is also related water ecological value development stage, water scarcity and the water price of waterworks, when the transaction executed in different periods, the corresponding SW will also be different, which means we need to measure SW dynamically during the execution period of the contract.
Water rights transactions are an effective market means to promote water resource conservation and optimal allocation. However, there are also market failures in the water rights market such as negative externalities caused by the change of water use, water quality not meeting the production requirements of the transferee, etc.
Most of the existing literatures on water rights trading is based on an ideal situation, that is, both sides of water rights trading can restrict their own behavior and abide by the provisions of the contract. However, in the process of the execution of the actual transaction contract, a breach of contract by one or both parties still exist. Even though we know that we need to use reward and punishment mechanism to restrain this phenomenon, there are few studies on quantitative analysis of reward and punishment amounts.
This paper proposes the concept of SW, and establishes the measurement model through the perspective of rewarding excellence and punishing inferiority. In this model, we evaluate the original and practical value of water rights in the trade. Then we focus on the gap between the original and practical value of water produced by the transferor to the transferee in trades, and modify the original value through the development stage coefficient of water ecological value, water resource scarcity index, water quality, etc.
In this case, Dongyang City is required to transfer Compared to the contract, the exchanged water quantity decreased by 1. The measurement of SW will help to promote the environmental justice in water rights trade, avoid possible disputes caused by different water quality, and protect the rights and interests of vulnerable groups in the transaction.
SW measurement in water rights trading has high practicability and applicability to ensure the fairness of transaction, improve the efficiency of transaction and reduce the subsequent transaction disputes. The method is generally suitable for the current three water rights trading modes in China regional water rights trading, water access trading, irrigation water user trading. Hoverer, the market is still far from being a mature water market, both the operation and guarantee systems need to be perfected.
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In order to ensure the long-term and orderly development of water rights trading, this paper puts forward the following suggestions:. Specifying the detailed requirements for multiple properties of the exchanged water in water rights transactions. Comprehensively consider the practical value of the exchanged water before transactions, and then formulate scientific and reasonable trading strategies, so as to ensure the fairness and rationality of the water right trading, and maximize the interests of both parties.
Establishing dynamic water quantity or transaction pricing mechanism for water rights trading. In view that the current long-term contracts have fixed water quantity and price, to divide the total execution period into several stages, and measure SW at the end of each stage as an assessment. The dynamic trading water quantity or price is then adjusted according to the assessment results. Improving the guarantee system for water rights trading. The government and the water rights trading platforms should constantly improve and optimize the guarantee system of water rights trading, supervise and guide each link of water rights trading, and accelerate the establishment of a mature market-oriented and government-supervised water rights trading system.
Due to the limitations of data and models, this study did not take factors into consideration such as time and engineering fees. In the future, we will consider the influence of exchange costs and engineering costs to improve the standardization model, and make it more suitable for long-term water rights contracts. More influence factors can be tried in the model in the future, such as effect of geopolitical relations. Qianwen Yu gratefully acknowledge the financial support from China Scholarship Council.
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According to the rewarding excellence and punishing inferiority function 9 and the SW measurement model 10 , corresponding quantity of W S with different highest rewarding function value c of different values are shown in Table A1. With Table A1 , the administration can determine the highest rewarding function value c.
With the increase of c , the original amount of water is converted into more and more SW, indicating that the reward is more and more powerful. The practical value of water rights provided by transferor is higher than original value for the transferee. That is to say, the value of water has increased, per unit of water in the contract worthies more after being rewarded. For example, when c is 0.
According to the existing studies [ 47 , 56 , 57 , 58 ], the calculation of the shadow price of water resources includes classifying the sectors, formulating the water consumption input and output table and then according to Equations 1 and 2 , using the statistical analysis software such as LINGO to get the detailed shadow price of different industries.
Of the 51 sectors, the sectors 1 to 39 are non-water conservancy sectors and sectors 40 to 51 are water conservancy sectors, of which names and classifications are given in Table A2. The concept diagram of water input and output table [ 57 ] is as seen in Figure A1 , and the water consumption input and output table can be formulated as in Table A3.
According to the analysis above and the water resources input-output table, the water usage coefficient can be obtained as in Table A4 [ 56 ], and the shadow of each industry can be obtained with equations 1 and 2 by LINGO. The shadow price is shown in Table A5. All authors have read and agreed to the published version of the manuscript. National Center for Biotechnology Information , U. Published online Mar 6. Author information Article notes Copyright and License information Disclaimer.
Received Dec 29; Accepted Mar 4. This article has been cited by other articles in PMC. Abstract Water rights trading is an effective way to optimize the allocation of water resources. Keywords: water rights trading, standard water SW , rewarding excellence and punishing inferiority. Introduction The global demand for water resources keeps increasing and water pollution problems will continue to worsen [ 1 ].