Redefining virtual water allocation in China based on economic welfare gains from environmental externalities

Abstract

As water scarcity intensifies worldwide, the equitable allocation of water resources has emerged as a critical challenge. This research investigates the intricate issue of allocating responsibility for virtual water, a concept that quantifies the water embedded in traded commodities. In pursuit of an effective allocation mechanism, we refine an innovative accounting scheme grounded in economic welfare gains arising from externalities. The results show that water-stressed areas in China, such as Xinjiang, significantly contribute to exporting virtual water and is responsible for 70%–85% of the virtual water outflow. Furthermore, more than 50% of virtual water imported from water-rich regions is attributed to these water-stressed areas while their trade partners bear the rest water responsibility. In contrast, southern China's abundant water resources reduce dependence on virtual water trade, leading to fewer responsibilities. Globally, the allocated responsibility for the new accounting mechanism reaches up to 7.5 times higher than for production-based accounting (PBA) and consumption-based accounting (CBA). Our study also reveals that the degree of dependency (price elasticities) plays a pivotal role in shaping the allocation outcomes. The implications of this research are significant for establishing a transparent and accountable framework for sustainable water resource management and facilitating seamless transitions toward sustainability. As global water scarcity intensifies, the redefined responsibility accounting according to the economic welfare is indispensable in addressing immediate and long-term water-related challenges.