An Integrated Framework for Risk‐Based Analysis of Economic Impacts of Drought and Water Scarcity in England and Wales

Drought and water scarcity pose a risk to the economy, particularly sectors where water is a crucial input to the production process. This paper describes integrated simulations of water shortages from a dynamic national water resource systems model with a static economic input-output (I-O) model to assess total drought risk to the economy. To quantify the economic risks of drought and water scarcity, the analysis: (a) integrates a large ensemble of simulated meteorological droughts, propagated through a national hydrological model and water resource systems model to simulate water availability from reservoirs and groundwater; (b) assesses implications of restrictions on water availability for multiple water user categories, representing natural and human contributions to water scarcity; (c) investigates how water shortages propagate into economy-wide direct and indirect impacts. The study focuses on England and Wales where the water supply system is considered under strain, with growing recognition of the economic risk of prolonged and widespread shortages. The direct Expected Annual Loss (EAL) to water users, averaged over an ensemble equivalent to 2800 years of synthetic daily weather, is estimated to be £11.7 million in the 2011 base-year. Accounting for indirect economic losses results in a total EAL of £30.2 million in 2011. The most severe event simulated results in a total loss of £1.4 billion in 2011, equivalent to 0.11% of GVA. The analysis provides a framework to assess what the economically efficient level of system reliability should be, and for deciding upon appropriate water management regulations and strategic investments.