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

Periodic Reporting for period 1 - WATER DROP (Droughts and Water Scarcity in the EU: Economic Impact, Adaptation, Policy Implications and Integrated Assessment Modelling)

Reporting period: 2016-10-01 to 2018-09-30

The existence of different types of droughts (meteorological, agricultural, hydrological and socioeconomic droughts), their slow onset and long duration and their multiple effects (direct and indirect) over different economic sectors make the quantification of drought impacts an extremely difficult task. Examples of direct impacts focus but extend beyond the agricultural sector. Direct impacts can propagate or cascade quickly through the economic system, affecting adjacent economic sectors that can belong to regions further apart from where the drought originates. This spatial heterogeneity makes it crucial to analyse the effects of droughts at the local level as well as to consider the implications for regions and economic sectors.

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 very relevant for the efficient design of disaster risk management instruments and other policy-related measures relevant to adapt to the consequences of climate change.

The objectives of WATER DROP are twofold: a) to advance in the process of understanding and accurately measuring the overall and sector-wide economic impact of agricultural droughts at the local level; b) to integrate the previously estimated direct impacts into economic tools that enable the identification of indirect impacts of droughts using a bottom-up approach. The combination of a) and b) result in a comprehensive assessment of the total economic effects of droughts on the economy.

WATER DROP has demonstrated that: i) to effectively characterise agricultural drought stress at the local level, satellite-based indicators that look at the vegetation health status of the plant are preferred to precipitation anomaly indicators; ii) even though the combination of multiple meteorological and satellite indicators help to better characterise the behaviour of agricultural productivity under drought scarcity, the use of only a few representative variables can be enough to obtain good predictive models of the direct effect of droughts on crop yields, and iii) the macroeconomic cost of agricultural droughts at the country level is dependent on the intensity of the experienced drought and the productive economic structure of the region analysed. For example, in Italy, drought can cost 0.55 to 1.75 billion euro, depending on the overall drought severity experienced.
The first part of WATER DROP has been devoted to learning how to measure drought impacts on the agricultural sector with a high-resolution spatial level. To do so, alternatives measures of drought stress (meteorological and satellite-based) have been explored. Their relation with yields of the main staple crops was examined in Spain and Italy using farm-level data based on farm-level agricultural surveys. Different statistical and econometric techniques were applied, and different spatial aggregation levels were considered. As a result of this exploratory research activity, two academic papers emerged: i) one demonstrating the suitability of satellite-based indicators to account for drought stress in local assessments of droughts, and ii) a work showing how the combination of indicators from different sources help to better forecast the productivity of cropping systems under water scarcity.

In a second phase of the project, the estimates obtained previously were integrated into macroeconomic tools that enabled the identification of the indirect effects of droughts in the economy, once trade between regions and productive factor reallocation between sectors were allowed. The total effect of droughts, understood as the combination of direct and indirect impacts, was then estimated. This effect in monetary terms (cost) is dependent on the total intensity of the drought and how the drought affects different regions.

All these results have been communicated to an academic audience, via participation of the Principal Investigator (PI) in international conferences and seminars. Likewise, the main messages of these research activities have been synthesised and are available at the webpage of the project as well as in the webpage of the PI.
WATER DROP has pioneered in the exploration of drought impacts at the local level. The use of farm-level, survey-based agricultural datasets and satellite data for drought monitoring have been instrumental to attain this goal.

More importantly, WATER DROP has advanced in the understanding and the estimation of the indirect impacts of droughts. This have only been possible through the integration of models and tools from different research disciplines: climatology, agronomy and economics.

The new methodology proposed by WATER DROP helps to quantify the overall economic cost of agricultural droughts and can represent a new benchmark to assess drought impacts, as it is fully adaptable and scalable to other regions and countries. This new tool can be used by member states or supranational institutions for different goals, such as agro-environmental policy valuation, drought risk management and climate change impact projections.
A description of the method proposed to estimate the total effect of droughts in an economy