Droughts and Water Scarcity in the EU:
Economic Impact, Adaptation, Policy Implications and Integrated Assessment Modelling

About Water Drop

Increased droughts and related water scarcity scenarios are expected to be one of the harmful effects of global warming and, because of the local nature of these phenomena, some areas will be more prone to them than others. Understanding and properly measuring the overall and sector-wide economic impact of those episodes at the geographically finest available level is of crucial importance for the design of disaster risk management instruments and other policy-related issues. At the same time, it becomes necessary to assess whether this response varies over time. In other words, we need to know whether we adapt to climate change. Adaptation in the context of climate change is a concept that raises many questions: empirical estimates are scarce and highly desired by scientists and institutions, like the IPCC; how this adaptation mechanism can be embedded into economic models of climate change is also an unresolved issue. These problematic issues will be addressed in this project.

The objective of this research project is twofold: on the one hand, measuring the economic impacts of droughts and test for the existence of adapting behaviour in the context of responses to droughts and, on the other hand, respond the demands of the IPCC that urge for progress in the integration and modelling of adaptation into climate-economy models. To do so, in a first stage I will apply econometric techniques envisaged by the new climate-economy literature to regionally detailed data and obtain estimates of the economic impacts of droughts and adapting behaviour. Then, I will resort to sophisticated climate-economy models, like CGE and IAM models, to shed light into the modelling of adapting behaviour under potentially uncertain scenarios.

The workload of this project is distributed into three Working Packages (WP), each devoted to one big block, namely impacts, adaptation and drought modelling.

Drought Impacts

In the context of global warming, as drought episodes become increasingly frequent, it is crucial to address whether major cereal crops are becoming more sensitive to climate variations as to ensure food security in the years to come.

In a first stage, we benefit from ESYRCE, a Spanish field-level dataset on crop yields and surfaces spanning from 2003 to 2015 to estimate the impact of agricultural drought on rainfed cereals. To characterise agricultural drought stress, we use the Vegetation Condition Index and the Temperature Condition Index, two remote sensing indicators of vegetation health and soil temperature, respectively. We identify that both indicators are good predictors of cereal yields and are able to explain by themselves a good fraction of annual yield variation.

Fig. - The Drought Environment Index (DEI) for wheat (left) and barley (right) reveals decreased sensitivity of crops exposed to extreme drought stress, as described by EI quintiles.

We also build an environment index to measure changes of sensitivity of yields to drought stress. By looking at each crop, we find that the general stagnation of cereal yields in Spain during the last fifteen years has been accompanied by an increase in resilience of wheat and barley fields to very adverse drought conditions, characterised by very high temperatures and extreme canopy stress, possibly attributable to the development of more drought-resistant seed varieties.


Adaptation to Droughts

The challenge of confronting the impacts of climate change manifestations is often framed in terms of two potential paths that economic and social agents can take: adaptation and mitigation. Adaptation is a response to climate change that seeks to reduce the vulnerability of social and biological systems to climate change effects. Even if emissions of greenhouse gases (GHG) are stabilised relatively soon, climate change and its effects will last many years, and adaptation will be necessary. The capacity and potential for humans to adapt (called adaptive capacity) is unevenly distributed across different regions and populations. Adaptation involves efforts to limit our vulnerability to climate change impacts through various measures, while not necessarily dealing with the underlying cause of those impacts. Empirical studies that measure any kind of adapting behaviour are extremely scarce and really pursued by the scientific community.

As critical as having accurate and proper estimates of the economic impact of droughts is determining how this effect evolves as these phenomena become more frequent. In the case that concerns us, it is expected that economic agents will be able to internalise (at least partially) the harmful consequences of droughts and adapt to them eventually. Having estimates of the degree of adaptation of our economies to recurrent drought events would be extremely useful insofar as it could ease the design and implementation of drought-risk management instruments. As mentioned, the different degree of intensity of droughts episodes across space and the uneven adapting capacity of different individuals encourages us to look at this problematic at a local scale.

Integrated Assessment of Droughts

In its Fifth Assessment Report, the Intergovernmental Panel on Climate Change (IPCC) complaints relentlessly about the lack of empirical adaptation estimates and about the small quantity and poor quality of exercises that seek to model adaptation in an analytical framework. While the first part of their claim will be partially addressed in the first stage of the project, I will deal with the second part during the subsequent stages..

I will compare and further analyse the results obtained on the presence of adapting behaviour in response to droughts incorporating my results to Integrated Assessment Models (IAMs). An IAM for climate change is a multi-equation model linking aggregate economic growth with simple climate dynamics to analyse the economic impacts of global warming. IAM models have proven themselves useful for understanding some aspects of the economics of climate change. Integrated analysis of adaptation can assess the costs, benefits, and uncertainties of environmental policies, and ought to be able to provide important insights for their development and implementation. Recent efforts have gone further towards making adaptation explicit by including adaptation as a specific control variable within IAMs. Still, there is broad agreement that more needs to be done to get adaptation better represented within those models. Another issue is uncertainty. Climate change is all about uncertainty: uncertainty governing the natural processes involved, uncertainty arisen due to its long-term nature, uncertainty on how agents react to those phenomena and uncertainty on how every event is modelled. Most IAMs are deterministic and way too complex to permit a proper incorporation of uncertainty. However, some recent research papers propose a state-reduced formulation of the problem, making it suitable for uncertainty analysis. This model will serve us as a benchmark tool to predict the behaviour of economic agents in the event of extreme weather events. With this exercise, I will be able to improve on the modelling of the damage function of IAM.