Macroeconomic Impacts of Water Allocation Under Droughts. Accounting for Global Supply Chains in a Multiregional Context

In addition to exacerbating water scarcity, climate change is expected to lead to an increase in the frequency and magnitude of droughts. During an extreme water shortage, economic agents may find it difficult to modify their production structure immediately, and will therefore try to maintain current production and commercial patterns. The study takes this behavior into account and combines a Multi-Regional Input-Output model with a non-linear programming optimization model to assess the macroeconomic impacts of an extreme drought on a global scale. It analyses how these effects propagate through interconnected supply chains to different sectors and countries, and it also evaluates the implications of different water allocation policies in terms of GDP impacts. Our results show that the economic effects of the drought may spread far beyond the directly affected region. When the drought affects only agriculture, we find that negative economic impacts can be mitigated by adjusting production and trade. In contrast, when water availability is reduced uniformly across all economic sectors in the drought-stricken region, economic losses spread across the globe