Download Economic risks

Economics of adaptation and extreme
weather-related risks in Europe
Reinhard Mechler
IIASA
EIONET/EPA network workshop on
Impacts, Vulnerability and Adaptation to climate change
EEA, 27-28 November 2007
Copenhagen
Adaptation economics
• Costs of inaction: Damage costs with unmitigated climate
change
= Benefits when avoided/reduced
• Costs of Adaptation
• Balancing the two: Cost-Benefit, Cost-efficiency etc.
(“optimal resource allocation, “efficient resource use”)
• To be done in terms of economic flows: GDP, consumption
2 decisions of importance
• Mitigation decision: avoiding dangerous climate change:
see Stern, 2007:
– Cost of inaction of 5-20% losses/a can be avoided
– with mitigation cost of 1% GDP/a
• Adaptation decision: Adapt efficiently to ongoing and
unavoidable climate change
– Where and who?
– How much?
– When?
Costs and benefits of adaptation
Cost of climate change
without adaptation
Costs of climate change
(in GDP)
Cost of adaptation plus
residual climate impact
Net benefit of adaptation
Residual impact
after adaptation
now
Slightly adapted from Stern, 2007
Global mean temperature
State of art: costs of inaction
ADAM
The Coverage of Marginal Economic Costs of Climate Change against the Risk Matrix
Source: Watkiss et al. 2006
State of art: costs of adaptation
•
Limited and fragmented in terms of sectoral and regional coverage
– There seem to be some low-hanging fruits, but
– barriers, limits and costs are not fully understood
•
Adaptation not done in isolation for coping with cc
•
Adaptation costs are usually expressed in monetary terms, while benefits in
in monetary as well as nonmonetary terms (e.g., changes in yield, welfare,
population exposed to risk)
•
Focus on model-based: Integrated assessment, gen. equilibrium
– Less bottom-up analysis focussing on existing adaptation: PESETA, ADAM
– National assessments with economic component: Finland, UK, NL
– Less ex-post studies (of necessity)
•
“Sectors”
– sea-level rise,
– agriculture,
– energy demand
– water resource management,
– and transportation infrastructure.
Extreme events
Public
Planned
Autonomous
Adaptation to
Natural Disasters
Private
Adaptation and Mitigation (ADAM)
•
To assess the extent to which existing and evolving EU (and world)
mitigation and adaptation policies can achieve a tolerable transition (a
‘soft landing’) to a world with a global climate no warmer than 2°C above
pre-industrial levels, and to identify their associated costs and
effectiveness, including an assessment of the damages avoided compared
to a scenario where climate change continues unchecked to 5°C.
•
To develop and appraise a portfolio of longer term strategic policy
options that could contribute to addressing identified shortfalls both
between existing mitigation policies and the achievement of the EU’s 2°C
target, and between existing adaptation policy development and implied EU
goals and targets for adaptation.
•
To develop a novel Policy-options Appraisal Framework and apply it
both to existing and evolving policies, and to new, long-term strategic policy
options, so as to inform: European and international climate protection
strategy in post-2012 Kyoto negotiations, a re-structuring of International
Development Assistance, the EU electricity sector and regional spatial
planning.
Extreme events and Europe
•
Increase in natural disaster losses: number of disastrous weather and climaterelated events in Europe per year doubled over the 1990s compared to 1980s
•
Increase as of today largely driven by socio-economic factors, but mounting
evidence of a significant climate-change signal in natural disaster events
•
In Europe, wide ranging impacts of changes in current climate already
documented, such as
– More frequent riverine and coastal flooding,
– Increased severity of droughts,
– Health risks, e.g. 2003 with 70,000 premature deaths,
– Increased risk of inland flash floods.
•
Winners and losers of climate change in Europe in shorter-term
•
As climate change continues, negative impacts are likely to outweigh its benefits
Knowledge gaps and ADAM
• Important knowledge gaps:
– Lack of a European-wide consistent, transparent and probability-based
approach for the quantification of impacts from extreme weather events
(maps!)
– Wider economic risks of extreme events not well covered
– Adaptation options and their costs and benefits
• ADAM
– Open-source, probabilistic risk analysis
– Direct/financial risks: Assets risk maps and hotspots
– Economic risks and adaptation for the public and economic sectors in
hotspot countries in Europe
– Full macroeconomic assessment of impacts and adaptation in EU for
sets of countries
– Catalogue of “promising” adaptation options: costs and benefits
Focus of ADAM work on extremes
•
Types
– Floods,
– Heat-wave,
– Drought and frost to agriculture,
– Forest fire,
– Windstorms to forests.
•
Sectors:
–
–
–
•
Aggregate
Public sector (Infrastructure and public finance)
Economic sectors
Key vulnerable areas according to Adaptation Green paper:
– “Southern Europe and the entire Mediterranean Basin exposed to a
combined effect of high temperature increases and reduced precipitation in
areas already stressed by water scarcity. “
– “Densely populated floodplains, exhibiting an increased risk of storms, intense
rainfall and flash floods leading to severe and widespread damages to built-up
areas and infrastructure. “
Potential end users
• Public sector
– Union: agriculture and forestry policies, solidarity fund and cohesion
instruments
– National: disaster management, fiscal and infrastructure planning
– Regional: spatial planning
– Local: adaptation planning
• Private sector
–
–
–
–
Agriculture: coping with heatwaves and drought
Energy: flood and storm impact on energy infrastructure
Insurance industry: risk
Households: risk incentives and perception
Some results: Financial/asset risk maps
• What are spatially explicit asset losses now and in future
(2025, 2100)?
• Where are geographical hotspots?
• Baseline for costs of inaction
Floods: from hazard …
European Flood Hazard
Map
Source: JRC, 2007
to risk: asset losses in monetary terms
Damages for 100 year flood events
Source: JRC, 2007
Risk in relative terms
Hotspots?
Average annual damage
as a fraction of regional GDP
Source: JRC, 2007
In 50 European NUTS-3 regions (i.e. provinces) the share of
population potentially exposed to high flood risk is above 20%;
Almost all of the 12 newcomers to the EU with potential average
annual damage due to floods higher than 1% of GDP
Agricultural risks due to heat and water stress
Potential economic damage
(Euro/hectare) due to both heat
and water stress, calculated for
durum wheat for a return period
of 20 years
Source: DISAT, 2007
Euro/hectare
Future risk: heavy precipitation
Period 1961-1990
Projection for the 2090s (SRES A2 scenario)
Source: PAS, 2007
Percentage share of heavy precipitation in total annual precipitation
Results 2: Economic risks:
Fiscal and aggregate risks
• Financial losses may lead to important fiscal and economic risks
– EU solidarity fund: set up in 2002 after severe flooding in Central Europe as
an disaster assistance cohesion mechanism for reconstruction and relief
support for EU member countries and respective regions
– Since then, more than 15 countries have asked and received assistance
involving large and small EU members alike
– IPCC, 2007 suggests drought and flood hazards will increase over Europe due
to Climate Change
• Aim of this part of the ADAM project:
identify a set of extreme events (and associated risks) that in the near
future are beyond the economic adaptive capacity of identified regions and
sectors in Europe
• Baseline for medium-longer-term time horizon with changing hazard
frequencies and intensities and changing socioeconomic context
Case Study Austria
Exceedance probability
probability of exceedance
0.12
0.10
0.08
0.06
0.04
0.02
0.00
0.00
1000.00
2000.00
3000.00
4000.00
5000.00
Damage Losses in million Euros
Exceedance probability curve
Upper Austria based on A2.1 work
Source: JRC, 2007.
The Upper Danube catchment area
Source: JRC, 2007
for
6000.00
In economic growth framework for time horizon of 10 years:
Probabilistic fiscal risks as baseline for costs of inaction
Austria
BAU with no events
Fiscal Risk
Frequent events
Trajectories of governments’ variable (discretionary) budget for a time horizon of 10 years
General equilibrium framework: time horizon: > 10 years
Agriculture
Foresty
Fisheres
Energy
supply
Manufact
Building and
construct
Transport
Tourism
Other
services
Final
demand
Agriculture
Foresty
Fisheres
Reduction of energy demand
Energy supply
Manufacturing
Building and construction
Transport
Less costly because of snow clearing, more costly because of extremes
Tourism
Shift of
mode
Shift of
habits
Other services
Damages caused by extreme events
Real capital
Health impacts
Labour
Natural resources
Grow ing season incr
Stock migr
Increase of
inflow
Integration of climate change impacts in an input-output scheme for regions in Europe
Costs and benefits of adaptation
Percent change
10.0
5.0
0.0
All = 23
E = 17
-5.0
E = 21; S = 29
E = 17; S = 33
-10.0
-15.0
-20.0
GDP
Private consumption Public consumption
Investments
Changes in economic indicators in different regions when introducing shocks
Dealing with Uncertainties
Loss distribution
Uncertainty is dealt with,
e.g through confidence intervals
based on JRC flood data
1.02
1.00
0.98
F
0.96
0.94
Estimated
0.92
Upper Confidence
Lower Confidence
0.90
0.88
0
0.05
0.1
0.15
0.2
0.25
0.3
Capital Stock destroyed
0.35
0.4
0.45
Challenges
As stated in Green Paper: Pillar 3
• Improve European-wide risk, impact and cost/benefit assessment for
adaptation responses, as compared with "no action“
• Develop indicators to measure the success of responses: ex-post
• Improve integrated assessment and the development and use of tools for
demonstrating economic, environmental and social benefits of adaptation
for European regions crossing national boundaries.
• Compare integrated EU-wide responses with sectoral approaches
including analysis of socio-economic costs and benefits.
Challenges: costs of inaction
• Need for more detailed, and consistent European studies
• Complement the global studies with bottom up, more disaggregated
studies
• To consider alternative temporal and spatial aggregation criteria (i.e.
over time and location)
• Need to give greater consideration to uncertainty and the
implications for policy decisions;
• Increase the number of real case studies
• Expand the coverage of studies, to include non-market damages
and the impacts of extreme events and major catastrophic events
Source: Watkiss, 2007
Challenges: costs of adaptation
• Improve linkage between costs of adaptation with residual damage
(and costs of mitigation)
• Identify adaptation options at different levels across Europe, and
assess costs (through a ‘good practice’ European assessment of
adaptation costs, including ex post assessment)
• More work needed on “realistic” adaptation options by different
stakeholders in different socio-economic, cultural and political
settings
• More focus needed on welfare costs and distributional effects: Most
studies assess direct costs or expenditures (on coastal defence,
health care, energy bills)
Source: Watkiss, 2007