Climate and socio-economic changes are expected to increase environmental financial risk, determining revenues to be affected and costs to be increased by weather events such as floods and droughts. A traditional solution to reduce environmental risk is a structural approach i.e., building or modifying infrastructures such as dams and reservoirs, river and lake dredging. An alternative emerging solution is the adoption of financial tools such as reserve funds or third-party insurance to hedge the financial losses. Yet, these two strategies are rarely combined and it is often difficult to compare and evaluate them objectively. In this work, we propose a method to design and evaluate integrated structural and financial solutions to reduce the financial risk caused by drought and floods in a shared basin. The approach is developed on the case study of Lake Maggiore, a regulated lake located on the south side of the Alps. The lake is regulated since the '40s to meet downstream water demand and to allow a reliable outflow which sustains several human activities and environmental services. However, the adopted lake regulation and urban development over the years have contributed to increased flood risk along the lake shore. For this reason, the lake management is a controversial topic opposing upstream and downstream stakeholders affected by flood and drought risk respectively. In the last 30 years, several structural projects involving the excavation of the lake outlet, so as to increase the lake outflow, have been proposed, but an agreement among the stakeholders on one or the other has never been possible. From a financial point of view, reserve funds, where each subject keeps a pool of money to cover financial losses, or third party index-based insurance contracts, where an environmental index triggers a payout to the insured party, are possible strategies. The main core and objective of this work are to assess the introduction of a structural action on the water system, combined with the adoption of financial instruments as a hedge against environmental financial risks. In order to properly evaluate and compare physical and financial management strategies, we adopt the Option Price (OP) method which adds the concept of risk aversion to a traditional cost and benefit analysis. The considered physical action is the excavation of the lake outlet (dredging) which would reduce the shoreline risk of flood increasing the water release from the lake's dam. Several levels of excavations are tested in combination with index-based insurance contracts with different levels of coverage. The objective is to evaluate the potential of this integrated solution in efficiently and cheaply reducing and hedging the environmental financial risks of both stakeholders. Results confirm the risk hedging capacity of the structural intervention, which appears more effective when combined with the insurance tool. However, the economic profitability of the combined instruments is limited by the cost (i.e. premium) of the designed insurance contract, which appears very high due to the statistical characteristics of the covered losses (high and very unfrequent). Neverthless, the potential of these integrated strategies deserves to be further investigated.
Ci si attende che i cambiamenti climatici e socio-economici aumentino il rischio ambientale e finanziario, facendo sì che eventi climatici come piene e magre possano influenzare i guadagni ed aumentare i costi. Una soluzione più tradizionale per ridurre il rischio ambientale è un'approccio di tipo strutturale, i.e., la costruzione o modifica di infrastrutture come dighe o bacini idrici, o il dragaggio fiumi o laghi. Una soluzione alternativa emergente è l'adozione di strumenti finanziari come i fondi di emergenza o le assicurazioni sulla responsabilità civile per coprire perdite di tipo finanziario. Tuttavia, queste due strategie vengono raramente combinate ed è spesso difficile compararle e valutarle in modo obiettivo. In questo lavoro proponiamo un metodo per progettare e valutare soluzioni strutturali e finanziarie integrate per ridurre il rischio finanziario causato da magre e piene in un bacino idrico condiviso. L'approccio è sviluppato sul caso di studio del Lago Maggiore, un lago regolato situato a sud delle Alpi. Il lago è regolato fin dagli anni '40 per incontrare la domanda idrica di valle e permettere un deflusso affidabile che possa sostenere le diverse attività umane e i servizi ambientali. Tuttavia, nel corso degli anni la regolazione del lago adottata e lo sviluppo urbano hanno contribuito ad aumentare il rischio di esondazioni lungo le rive del lago. Per questa ragione la gestione del lago è una questione controversa che oppone i portatori di interesse di valle e di monte, soggetti rispettivamente a piene e magre. Negli ultimi anni sono stati proposti diversi progetti strutturali riguardanti uno scavo della foce del lago, così da aumentare il deflusso dallo stesso, ma non è mai stato raggiunto un accordo tra i diversi portatori di interesse. Da un punto di vista finanziario, possibili strategie sono l'adozione di fondi di emergenza, ove ciascun soggetto accantona un fondo di denaro per coprire eventuali perdite finanziarie, o contratti assicurativi sulla responsabilità civile basati su indici, ove il superamento di un determinato indice ambientale comporta il risarcimento alla parte assicurata. Il cuore e l'obiettivo principale di questo lavoro è valutare l'introduzione di un'azione strutturale nel sistema idrico, combinata con l'adozione di strumenti finanziari come copertura contro il rischio ambientale e finanziario. Per poter valutare e comparare in modo appropriato strategie di gestione fisiche e finanziarie adottiamo il metodo dell'Option Price (OP), che aggiunge ad una tradizionale analisi costi e benefici il concetto di avversione al rischio. L'azione fisica considerata è uno scavo del fondo del lago (dragaggio) che ridurrebbe il rischio di esondazioni sul litorale, aumentando il rilascio di acqua dalla diga del lago. Vengono testati diversi livello di scavo in combinazione con contratti assicurativi basati su indici con diversi livelli di copertura. L'obiettivo è valutare il potenziale di questa soluzione integrata nel ridurre e coprire in modo efficiente ed economico il rischio ambientale e finanziario di entrambi i portatori di interesse. I risultati confermano la capacità dell'intervento strutturale di coprire il rischio, intervento che risulta maggiormente efficace quanto è integrato con lo strumento assicurativo. Tuttavia, il vantaggio economico degli strumenti combinati è limitato dal costo (i.e. il premio) del contratto assicurativo proposto, che appare particolarmente elevato per le proprietà statistiche delle perdite da coprire (elevate e molto infrequenti). Ciononostante, il potenziale di queste strategie integrate merita di essere ulteriormente investigato.
Integrated infrastructural and financial options to manage weather risk in a multipurpose regulated lake
TESINI, VANESSA
2017/2018
Abstract
Climate and socio-economic changes are expected to increase environmental financial risk, determining revenues to be affected and costs to be increased by weather events such as floods and droughts. A traditional solution to reduce environmental risk is a structural approach i.e., building or modifying infrastructures such as dams and reservoirs, river and lake dredging. An alternative emerging solution is the adoption of financial tools such as reserve funds or third-party insurance to hedge the financial losses. Yet, these two strategies are rarely combined and it is often difficult to compare and evaluate them objectively. In this work, we propose a method to design and evaluate integrated structural and financial solutions to reduce the financial risk caused by drought and floods in a shared basin. The approach is developed on the case study of Lake Maggiore, a regulated lake located on the south side of the Alps. The lake is regulated since the '40s to meet downstream water demand and to allow a reliable outflow which sustains several human activities and environmental services. However, the adopted lake regulation and urban development over the years have contributed to increased flood risk along the lake shore. For this reason, the lake management is a controversial topic opposing upstream and downstream stakeholders affected by flood and drought risk respectively. In the last 30 years, several structural projects involving the excavation of the lake outlet, so as to increase the lake outflow, have been proposed, but an agreement among the stakeholders on one or the other has never been possible. From a financial point of view, reserve funds, where each subject keeps a pool of money to cover financial losses, or third party index-based insurance contracts, where an environmental index triggers a payout to the insured party, are possible strategies. The main core and objective of this work are to assess the introduction of a structural action on the water system, combined with the adoption of financial instruments as a hedge against environmental financial risks. In order to properly evaluate and compare physical and financial management strategies, we adopt the Option Price (OP) method which adds the concept of risk aversion to a traditional cost and benefit analysis. The considered physical action is the excavation of the lake outlet (dredging) which would reduce the shoreline risk of flood increasing the water release from the lake's dam. Several levels of excavations are tested in combination with index-based insurance contracts with different levels of coverage. The objective is to evaluate the potential of this integrated solution in efficiently and cheaply reducing and hedging the environmental financial risks of both stakeholders. Results confirm the risk hedging capacity of the structural intervention, which appears more effective when combined with the insurance tool. However, the economic profitability of the combined instruments is limited by the cost (i.e. premium) of the designed insurance contract, which appears very high due to the statistical characteristics of the covered losses (high and very unfrequent). Neverthless, the potential of these integrated strategies deserves to be further investigated.File | Dimensione | Formato | |
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https://hdl.handle.net/10589/146563