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Economic results

While the biophysical analysis has compared various impacts, using different metrics and without necessarily having to monetise them, the economic analysis integrates most of these impacts into the computable general equilibrium (CGE) economic model GEM-E3 in order to make them comparable under a common economic framework. This provides a means for assessing the relative economic importance of different heterogeneous direct impacts (for example, allowing comparison of the relative importance of a 2% increase in tourism expenditure and a 3% fall in crop yields). It also enables assessment of how the impacts of climate change in general vary across European regions, in terms of GDP and welfare.

The following climate impact categories have been considered in the preliminary economic assessment: agriculture, coastal areas, energy, forest fires, human health, river floods, tourism, and transport infrastructure.

Methodology

The GEM-E3 model is used to compute the overall economic impacts of climate change. The model uses a CGE approach that allows exploring the indirect economic consequences of climate change due to the cross-sectoral effects within the economy, on top of the direct economic impacts.

The GEM-E3 CGE model analyses the interactions between the economy, the energy system and the environment. The EU version employed in PESETA II is based on EUROSTAT data (base year 2005), with most member states individually represented and modelled. The countries are linked through endogenous bilateral trade flows. The GEM-E3 model integrates micro-economic behaviour into a macro-economic framework and allows the assessment of medium to long-term implications for policies.

The various impact categories are integrated by changing specific elements of the production structure and supply-side (capital and labour) of the different sectors and of the consumption structure of households. The following table summarises the implementation of the different impact categories in GEM-E3, with a very similar methodology to that of the PESETA project (see Ciscar et al., 2011).

ImpactBiophysical model outputModel implementation
AgricultureYield changeProductivity change for crops
EnergyHeating and cooling demandEnergy demand changes in residential and service sectors
River floodsResidential buildings damagesAdditional obliged consumption
Production activities lossesCapital loss
Forest FiresBurned areaCapital loss
Reconstruction costsAdditional obliged consumption
Transport infrastructureChanges in cost of road asphalt binder application and bridge scouringAdditional obliged consumption
Net change in costs related to extreme flooding and winter conditionsCapital loss*
Coastal areasMigration costAdditional obliged consumption
Sea floods costCapital loss
TourismTourism expenditureChanges in destination and tourism expenditure by bilateral import preferences
Human healthHours lost due to morbidity and mortalityChange in labour supply
Additional health expenditures (morbidity)Additional obliged consumption of health services
Warmer temperatureLabour productivity change in agriculture and construction sectors
MortalityWelfare loss (ex-post)

Implementation of sectoral climate impacts in GEM-E3

* Capital loss can be negative when combined changes in winter conditions and
extreme flooding create conditions that are more benign than the baseline

GDP changes results

The following figure shows the GDP effects for the EU, decomposed both by impact categories and EU regions. Under the Reference run, losses could reach 1% of EU GDP, mainly because of impacts on coastal areas and agriculture. The overall GDP loss is reduced under the 2°C scenario. Losses from health effects (mortality) are notable in both the Reference and 2°C runs, particularly in Southern Europe. The effect of changes in energy demand is largely positive in the South and negative in the North. However, in terms of consumers' welfare the opposite is true (see below). Regarding the regional pattern of impacts, Central Europe North is the area most affected by GDP losses (up to 1.7% of GDP), as a consequence mainly of sea level rise. For Southern Europe GDP losses are also over 1% of GDP, led mainly by agriculture impacts and health impacts. In all regions considered, GDP losses become smaller when one moves from the reference run to the 2°C run.

GDP impacts for the Reference and 2°C runs (% GDP)

Welfare changes results

Welfare change is an appropriate metric to interpret the results of GEM-E3, as the economic model is rooted in neoclassical economics, where households pursue the maximisation of their welfare levels. Welfare changes for the core Reference and 2°C runs are shown below, expressed as a percentage of GDP. The net welfare loss is estimated to be 1.8% of GDP under the Reference run. The greatest negative impacts (2/3 of the total) are associated with the damages to human health, illustrating the fact that ignoring non-market impacts in the economic analysis of climate impacts can lead to severe underestimation of the overall climate damages. Other notable negative impacts are demand for energy in Southern Europe and coastal impacts (sea level rise) elsewhere. In Southern Europe, increased energy expenditure reduces consumers' welfare, even though it adds to GDP. This is because consumers have to reduce expenditure on other items and spend more on energy merely to maintain the same level of comfort. In the other regions, the opposite is true.

Welfare impacts for the Reference and 2°C runs (% GDP)

The Figure below shows regional welfare impacts in the two variants of the Reference run (variant 1 is warmer than the reference and variant 2 colder). Some specific impact categories experience large changes in damages between the variants, e.g. energy in Northern Europe (where cooling demand in variant 1 is considerably higher), river floods in the Northern Europe and UK & Ireland regions, and human health in most regions.

Welfare impacts for the Reference and its variants (% GDP)

Transboundary effects

An interesting issue to analyse is the extent to which climate impacts occurring in one EU region could affect the rest of the EU. Intuitively, impacts in one region would affect production and welfare elsewhere through trade effects, given the high degree of economic integration between the EU member states. Two simulations with the reference setting have been made to explore the role played by these trade effects.

In the first case, we imagine that sea level rise affects only the Central Europe North region. This leads to damages of around €20.5 billion in that region and a further €5.5 billion in the rest of the EU. In the second case we imagine the effect on crop yields (in the 2080s) is felt in Southern Europe only. This leads to damages of €15 billion within the region, and a further €3.5 billion elsewhere. Therefore, in both cases it appears that climate damages with a region lead to additional damages of around 25% occurring within the rest of the EU through trade effects

References

Ciscar J-C (ed.), 2014. Climate Impacts in Europe, The JRC PESETA II Project. JRC Scientific and Policy Reports, European Commission Joint Research Centre

Ciscar J-C, Iglesias A, Feyen L, Szabo L, Van Regemorter D, Amelung B, Nicholls R, Watkiss P, Christensen O, Dankers R, Garrote L, Goodess C, Hunt A, Moreno A, Richards J, Soria A, 2011. Physical and Economic Consequences of Climate Change in Europe. PNAS, 108 7 pp.2678-2683.