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, 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 Costs of climate change (in GDP) Global mean temperature now Cost of climate change without adaptation Cost of adaptation plus residual climate impact Residual impact after adaptation Slightly adapted from Stern, 2007 Net benefit of adaptation

State of art: costs of inaction The Coverage of Marginal Economic Costs of Climate Change against the Risk Matrix Source: Watkiss et al ADAM

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 Planned Autonomous PublicPrivate Adaptation to Natural Disasters

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 climate- related 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 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

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. “ Focus of ADAM work on extremes

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 Average annual damage as a fraction of regional GDP Source: JRC, 2007 Hotspots? 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 Source: PAS, 2007 Period Projection for the 2090s (SRES A2 scenario) 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

The Upper Danube catchment area Source: JRC, 2007 Case Study Austria Exceedance probability curve for Upper Austria based on A2.1 work Source: JRC, 2007.

Fiscal Risk Trajectories of governments’ variable (discretionary) budget for a time horizon of 10 years In economic growth framework for time horizon of 10 years: Probabilistic fiscal risks as baseline for costs of inaction BAU with no events Frequent events Austria

General equilibrium framework: time horizon: > 10 years Integration of climate change impacts in an input-output scheme for regions in Europe

Changes in economic indicators in different regions when introducing shocks Costs and benefits of adaptation

Dealing with Uncertainties Uncertainty is dealt with, e.g through confidence intervals based on JRC flood data

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