Optimal design of two-dimensional water trading based on risk aversion for sustainable development of Daguhe watershed, China

Water related problems, including water scarcity and pollution, have become increasingly urgent challenges especially in arid and semiarid regions. Two-dimensional water trading (2DWT) mechanism has been designed to unify the quantity and quality of water for relieving the water crisis. This study aims to develop a risk aversion optimization-two dimensional water trading model (RAO-2DWTM) for planning the regional-scale water resources management system (RWMS). This is the first attempt on planning RWMS through risk aversion optimization within the two-dimensional water trading framework. RAO-2DWTM cannot only support in-depth analysis regarding the effect of decision maker's preferences on system risk in different trading scenarios, but also reflect the interaction between water right trading and effluent trading, as well as disclose the optimal scheme of water resource management under uncertainties. Twenty four scenarios associated with different trading scenarios and robust levels are analyzed. The optimization scheme under the optimal risk control level is determined based on TOPSIS. Results revealed that 2DWT would bring high benefit with reduced risk cost, water deficit and emissions, implying the effectiveness of 2DWT mechanism. The results also disclosed that risk aversion behavior can mitigate water scarcity and pollution, as well as reduce risk cost, but may lead to some losses of system benefit. Consequently, decision makers should make trade-offs between system benefit and risk in identifying desired trading schemes. •The model reflects the interaction of water rights and effluent trading.•Two-dimension water trading would bring about the most benefit with reduced risk.•Risk aversion can mitigate water scarcity and pollution, but reduce system benefit.•Water rights trading would increase the trading amount of discharge permits.•TW has a greater effect on production, emission and benefit than TD, under 2DWT.