Abstract
In Australia’s Murray Darling Basin (MDB), short-term (allocation) and long-term (entitlement) water rights are separately traded, centrally reported, and disseminated to the public. Lewis utilizes this setting to demonstrate three primary findings concerning water rights and climate change risk. First, water rights appear to be a climate change hedge: in periods of diminishing supply, allocation cash flows spike as price increases offset quantity declines. Second, since 2014, entitlement prices in climate-exposed areas have increased approximately $1500 per MegaLitre (about 39%) more than prices in non-climate-exposed areas, while allocation prices have remained similar in both areas. These price differences provide a clear market signal about future scarcity and help define investment opportunities available today to preserve water resources. Finally, estimating the allocation of cash flow to rainfall elasticity and extrapolating using the 2050 IPCC rainfall scenarios, Lewis attributes about 21% of the price effect to differences in expected cash flow and the remainder to a lower discount rate. The premium Lewis estimates equates to a 1.2% lower rate of return for climate hedge or mitigation assets, a critical parameter in climate economics.
Bio
Ryan Lewis is an assistant professor of Finance at the Leeds School of Business at the University of Colorado at Boulder. His award-winning research centers on the pricing of risk in financial markets, with a particular focus on low probability or long-term events such as default or climate change. One strand of his research studies the way real estate, municipal bonds, and insurance markets price future sea level rise risk. Another centers on the priced risks in equity and debt markets and demonstrates that the specific owners of assets play a key role in determining prices and real-world outcomes. Lewis teaches numerous courses at Leeds including a newly created course on sustainable finance. He received his PhD from London Business School. Prior to entering academia, Lewis worked at a distressed debt hedge fund and in the macroeconomics division at the NY Fed. He has almost certainly let his CFA charter lapse.