WATER DROP

Drought risks and water scarcity are expected to intensify as a result of human-induced climate change. Some areas in Europe, notably the Mediterranean countries are more prone to prolonged drought spells than others. Understanding and properly measuring the overall and sector-wide economic impact of those episodes at the geographically most disaggregated 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 are somehow adapting 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. I will try to address both in this project.

The objective of my research is twofold: on the one hand, obtain quantitative measures of the economic impact of droughts and test for the existence of adapting behaviour 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 regional, European-wide data to obtain estimates of the economic consequences of droughts and unveil potential 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 deterministic and stochastic scenarios.

This study proposes a novel method to assess the overall economic effects of agricultural droughts using a coupled agronomic-economic approach that accounts for the direct and indirect impacts of this hazard in the economy. This methodology is applied to Italy, where years showing different drought severity levels were analysed. Agricultural drought stress was measured using the fraction of Absorbed Photosynthetically Active Radiation (fAPAR). Using a comprehensive, field-level dataset on agricultural yields, fAPAR-based statistical models for major Italian crops were applied and direct crop productivity impacts were estimated. Local-level, crop-dependent productivity shocks were fed into a regionalised Computable General Equilibrium model specifically calibrated for the Italian economy. Direct and indirect aggregate impacts after allowing for interregional trade and input reallocation were obtained. Total estimated damages showed large spatial variability and ranged from 0.55 to 1.75 billion euro, depending on the overall drought severity experienced. Although most of the losses were concentrated on agriculture, other related sectors, such as food industry manufacturing and wholesale services, were also substantially affected. Moreover, our simulations indicated the presence of a land-use substitution effect from less to more drought-resistant crops following a drought. This study sheds light on the characterisation of the total damages caused by droughts and represents a valuable tool that can be used to implement country-wide drought risk management plans and to evaluate drought management policies.