A framework for drought adaption under deep uncertainties: Application of Portfolio theory (Markowitz 2.0)

Abstract

Hydrological uncertainty, climate change, and water infrastructure development upstream transboundary basins may affect the safe access to water resources downstream, making socioeconomic and biophysical subsystems vulnerable. Therefore, it is vital to apply decision-making approaches to reduce vulnerability, especially in arid and semi-arid basins. This study evaluated an adaptation framework to reduce vulnerability through optimal water allocation in drought-prone areas. This framework was implemented in an area dependent on upstream transboundary water (Helmand River Basin). An integrated system dynamics model was developed using socioeconomic and biophysical factors identified by the Füssel Vulnerability Framework. The climatic variables of the basin were simulated and predicted by the output of AOGCM models. The trend of upstream annual precipitation and temperature changes during the 2021–2050 period based on the RCP4.5 emission scenario was −2% and +1.9 C compared to those in the historical period, respectively. The results indicated the drought intensification due to a 13% decrease in future runoff (2050) compared to the base period, leading to a reduction in value-added agriculture (8%) and the population (31%). Therefore, the latest version of portfolio optimization called Markowitz 2.0 was used. In order to decide on potential long-term growth versus short-term loss, an efficient frontier was formed between the expected return and the conditional value at risk (CVaR) based on the Markowitz 2.0 model. According to the model results, the development of the industrial sector as an approach with moderate (reasonable) risk could increase financial return by 43% and allocation to the environmental sector by 2.3 times. Finally, prioritizing the environmental sector was a high-risk approach with high returns that increased efficiency by 45%. The results showed that the proposed framework could help decision-makers, based on their risk-taking level, activate and develop decisions on water resource allocation and water-dependent productive sectors on the basis of efficient frontiers.