The economics of water conservation regulations under uncertainty: An application to Alberta's Lower Athabasca River Region

Abstract

Large water demands by the mining industry are of increasing concern around the world. Command and control water regulations may be highly inefficient. The cost of a specific command and control water management policy is studied for an oil sands mining operation in Canada, where restrictions on water withdrawals vary with fluctuations in the river. A dynamic stochastic optimal control model is specified for a firm choosing production, water use, and the timing to build a water storage facility, under conditions of uncertain oil prices and uncertain water withdrawal limits. A numerical solution of an HJB equation is implemented to determine the difference in value and optimal controls for the oil-producing asset, with and without water restrictions. The cost of the restrictions is estimated to be quite small given the current reserve base and capacity of the industry. The marginal cost of tightening restrictions is non-monotonic with respect to price volatility.