The impact of water conservation regulations on mining firms: a stochastic control approach
Yichun Huang and Margaret Insley. “The impact of water conservation regulations on mining firms: A stochastic control approach”, Water Resources and Economics, August 2021, Accepted paper, https://doi.org/10.1016/j.wre.2021.100185
55 Pages Posted: 9 Jul 2020 Last revised: 12 Aug 2021
Date Written: July 30, 2021
Large water demands by the mining industry are of increasing concern around the world. The cost of a specific water management regulation is studied for an oil sands mining operation in Canada, where restrictions on water withdrawals vary with fluctuations in the river. A stochastic optimal control problem is formulated 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. As no closed form solution is available, a stochastic dynamic programming approach 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 historical river flow conditions, while cost is shown to increase under drier conditions. A long run marginal cost curve is developed showing the cost of increasing restrictions given expectations about future river conditions and oil prices.
Keywords: water conservation regulations, oil sands, storage, stochastic optimal control, Hamilton-Jacobi Bellman equation, uncertain river flow, uncertain oil price
JEL Classification: Q30, Q40, C61, C63
Suggested Citation: Suggested Citation