Leonardo Badea (BNR): Climate change, natural disasters, and their impact on the economy
Petre Barac
Posted On February 20, 2023
Today’s world faces a number of simultaneous threats and challenges that endanger people and their livelihoods, some of which could be considered rare events until recently. Phenomena such as the COVID pandemic, Russia’s war against Ukraine, the energy crisis have shaken the world and highlight, above all, the importance of preparing for exceptional situations.
As the world recovers from the shock of the pandemic and, unfortunately, continues to face multiple other crises and extreme events, we realize that the likelihood of natural disasters accentuated by climate change further exacerbates vulnerabilities to adverse events.
The effects of climate change, increasingly stronger and more visible, and the degradation of the environment amplify the risks, as they reduce the capacity of ecosystems to protect us, sometimes causing extreme phenomena. These, unfortunately, are becoming more frequent and more intense, and exposure and vulnerabilities to natural disasters are constantly increasing. In addition, other factors, such as increased weather fluctuations, pollution, massive deforestation, loss of biodiversity, increased level of urbanization, expansion of activities in sometimes unsuitable areas, etc., also contribute to the risks of disasters (floods, landslides, avalanches, extreme temperatures, droughts, epidemics, etc.).
The evolution of the global temperature represents a reference indicator regarding the extent of climate change and its possible effects. The global average annual temperature has risen steadily, and Europe has warmed faster than this global average has advanced [1], leading to extreme weather events, with sometimes disastrous economic consequences. For example, let’s remember the floods in the summer of 2021 that affected several European countries, caused loss of human life, forced evacuations, interruption of electricity supply, destroyed homes, agricultural land and infrastructure, causing important economic losses, estimated at over 3 billion euros [2]. The drought, which hit a large part of European countries in 2022 [3], being considered the worst drought in the last 500 years, significantly affected agricultural production (including in Romania), caused decreases in river flows and water reserves, with a series of major implications in key economic sectors, such as energy (hydropower plants and cooling systems of other power plants were affected) or river transport. Periods of prolonged drought have also increased the frequency and intensity of wildfires. In 2022, the area destroyed by fires at European level was 250% higher than the average of the last 15 years. Also globally, there is an increase in the number of major events produced by natural causes (over 400 in 2021) [4].
Unfortunately, the vulnerability of human nature to natural disasters is very high. Natural disasters destroy lives, communities and, depending on their magnitude, can significantly affect a country’s economy. During the last 4 decades (between 1980 and 2020), natural disasters affected approximately 50 million people at European level and caused an average economic loss of approx. 12 billion euros/year [5].
The direct economic impact of disasters is immediately apparent – the destruction of residential and commercial properties, historical and cultural sites, capital, infrastructure. But we are also discussing an indirect and intangible impact, just as important, although not as easily observable or quantifiable – lasting negative effects on productivity, disruptions in distribution chains, the impact of diverting funds from investment to reconstruction, and, last but not least, significant psychological and social effects.
The severity of the impact of a disaster depends on the nature of the phenomenon, but also on a number of other aspects, such as the specificity of the area and the number of people affected, the local economic and social situation, the value of the goods exposed, etc. The effects of a disaster can have potentially significant long-term repercussions. In some cases, the economic and financial effects of disasters can be devastating. For example, according to a World Bank report [6] on disaster prevention and preparedness in Europe, the economic impact of floods and major earthquakes (for such events with only a 1% probability of occurring in a given year) could have maxima varying between 7% and 17% of GDP in some European states. Romania is among the countries most exposed to the risks of earthquakes and floods, according to this report, along with Cyprus, Greece, Slovenia, and Latvia.
Earthquakes are considered a major risk, and in some European countries, aging infrastructure represents a vulnerability in the event of an earthquake (including transport, health infrastructure, energy production and distribution facilities, etc.). If we think only of the most recent such events that affected Turkey and Syria in February, we see that they have triggered a humanitarian crisis, caused strongly negative economic effects, and exposed systemic dysfunctions.
So, the economic impact of extreme phenomena is different from one country to another and also varies from one period to another. According to a study by the European Environment Agency [7] on the economic losses caused by extreme climate phenomena in Europe, in the period 1980-2020 the greatest economic losses were recorded, in absolute terms, in Germany, France, and Italy. Per capita, the biggest losses were in Switzerland, Slovenia, and France, and the most important regional losses were recorded in countries such as Switzerland, Germany, and Italy. Of the total losses, only approx. 23% were insured, but also the amount of insurance was obviously different from one country to another (from 1% in Romania and Lithuania to 56% in Denmark and the Netherlands). The study I referred to previously also reveals the fact that most of the economic losses (approx. 60% of their amount) were caused by a small number of extreme phenomena (only 3%) and, as a trend, the annual average of losses was approx. 9.5 billion euros in the period 1981-1990; 11 billion euros in the period 1991-2000; 13.2 billion euros in the period 2001-2010, and 14.5 billion euros in the period 2011-2020.
Globally, according to the World Bank [8], the direct loss and destruction caused by natural disasters in 2020 was USD 210 billion. For the same year, 2020, AON [9] estimated losses from natural disasters at USD 297 billion, and what is noteworthy is that although the amount is considerably lower than the peak recorded in 2011 (USD 557 billion), it still exceeds by almost one-third the 21st century average. Also the year 2021 saw considerable economic losses, estimated at USD 252.1 billion, according to the Emergency Event Database [10]. For the year 2022, AON estimates that there were recorded economic losses of USD 313 billion, caused by 421 events produced by natural causes [11].
A large part of the costs caused by disasters in European countries is borne by the governments of the respective states. The World Bank’s report on disaster prevention and preparedness in Europe estimates that in order to mitigate the impact of such unfortunate events, the governments of European states are likely to finance on average costs of approx. 16 billion euros annually [12].
So, is it possible to have actions and measures that prevent and possibly limit the effects? Survivors and communities remain deeply affected by the loss of lives and livelihoods, and the authorities face the daunting task of restoring economic and social balance. In the face of such evolving risks and based on the lessons learned from recent events, it is necessary to strengthen the efforts to anticipate dangers and threats, but also the effective preparation based on perspective scenarios that, beyond civil protection measures, must consider the potentially affected economic sectors as well.
Rapid response measures are needed to alleviate the suffering of individuals and communities directly affected by these disasters (the provision of essential goods and services – medical services, water and energy supply, transport services, telecommunications, etc., taking into account possible trade restrictions or other potential disruptions that could affect free movement, as happened during the COVID pandemic, or other factors that could disrupt the supply of essential goods and services, such as the increasing incidence of cyber-attacks), as well as medium and long-term actions to support the reconstruction of an economy shaken by these shocks, most of the times, unpredictable.
There are no generally valid models for economic recovery, the reconstruction process being specific to each region or country that is hit by a natural disaster. However, there are some common challenges, such as the speed of recovery or the quality of economic recovery, and their effective management is imperative for the adoption of measures to reduce, as much as possible, the human suffering and the economic effects of these catastrophes.
Considering the magnitude and potential effects of these adverse phenomena, the risks must be managed on the basis of objective and effectively applied programs, strategies, and policies, which take into account, on the one hand, the prevention, as far as possible, of such disasters, and, on the other hand, the actual recovery measures, in the eventuality of their materialization, which should mainly target the most affected people and economic sectors.
The identification of vulnerabilities faced by critical sectors and priority areas, but also the integrated approach to such challenges supported by effective actions, are essential elements for strengthening resilience against these extreme phenomena. Investments in resilient and effective disaster response infrastructure, ecosystem conservation or strengthening mechanisms to prevent extreme events also bring numerous economic and social benefits.
Cooperation, coordination, coherence, and consistency of practical actions undertaken in key areas (environment, climate change, agriculture, energy, transport, research-development and innovation, etc.), as well as the identification of interdependencies between the risks related to the relevant sectors can significantly contribute to mitigating the impact of such phenomena.
It would be wrong to think that the current energy crisis induces the need to change the paradigm regarding sustainable development. There are opinions in the public space stating that Europe has been caught behind schedule regarding the energy crisis and the green development plan. I believe that the digital agenda and the concern for climate change, adopted as priorities at the EU level, are part of the solution. Thus, European energy independence by decoupling from Russian gas dependence is aided by the transition to alternative energy sources.
A recently mentioned analysis by The Economist [13] on the consumption of fossil fuels, energy efficiency, and the implementation of renewable energy solutions shows that due to the energy crisis generated by the invasion of Ukraine by Russia, the countries of the world had to look for alternative solutions to cover the deficit of energy and rising prices, and one of them is the use of renewable energy, which has accelerated the green transition by five to ten years.
It is a general consensus that climate change increases the risk of natural disasters with significant effects. From the middle of the last century to the present, the number of such events has increased approximately four times [14]. The widespread rise in temperatures causes ocean levels to rise and generates extreme weather events – devastating storms, prolonged droughts, major wildfires, floods. Thus, the financing of sustainable development can create a premise for reducing as much as possible the natural disasters that also occur due to climate change.
That is precisely why society must act in two directions. The first direction is the reduction of pollution and the decrease of the factors that lead to the intensification of extreme phenomena. It is up to all of us to protect the environment. The second direction is that of creating mechanisms for managing situations that may arise. All these measures, however, require funding, and as it is natural for the state to be actively involved and responsible for the fulfillment of many of the mentioned programs, this implicitly equates to an additional (but necessary and objective) increase in public spending. However, public budgets have already, for many years, been under the pressure of numerous other spending increases (just as necessary and objectively justified) such as those for safety and security (in the context of the war in Ukraine, but also of growing cyber threats or increasingly accentuated geopolitical tensions), for the support of the vulnerable categories against the increase in the expenses necessary for daily living (as a result of the increase in the prices of energy, food, medicine, and utilities in the context of the inflationary situation generated by the shocks on the supply side), the effort to reduce pollution, the aging of the population.
We therefore see that the pressures on public budgets are becoming more and more numerous, in most European states and in the world. At least the pressures generated by the causes listed above I think can be considered objectively justified by the legitimate need of governments to act and protect their citizens against short, medium or long term threats. So, the increase in these expenditures is probably unavoidable if we start from the principle that governments have a duty to act to maintain adequate conditions that allow people to preserve (through their own responsible actions facilitated by this appropriate framework) their standard of living and quality life. However, there are obvious constraints, economically justified, regarding the financing of these growing expenses, however objective and necessary they may be.
Therefore, in my opinion, two solutions that can contribute to a sustainable balance with long-term beneficial effects for society among all these pressures are: (1) increasing by all means necessary the efficiency of revenue collection, especially by using the digital transformation and the mechanisms for selection, allocation, realization, and tracking over time of expenditures from public resources, as well as (2) ensuring the maximum possible use of funding resources available through the various assistance and collaboration mechanisms at the European and international level, valorizing the programs, funds, and expertise that Romania can access, both as a member state of the European Union, but also from international financial institutions or state cooperation bodies.
Today, the need to act to protect the environment and the sustainable economic development are urgent, and our responsibility is to take the necessary measures, known and insufficiently operationalized until now, because, as Ernest Hemingway said – ”the world is a fine place and worth the fighting for”.
References:
[1] European Environmental Agency, Global and European temperatures, 2022, https://www.eea.europa.eu/ims/global-and-european-temperatures
[2] https://www.reinsurancene.ws/berenberg-says-european-floods-to-cost-reinsurers-up-to-e3bn
[3] https://edo.jrc.ec.europa.eu/documents/news/GDOEDODroughtNews202208_Europe.pdf
[4] https://www.preventionweb.net/understanding-disaster-risk/disaster-losses-and-statistics
[7] https://www.eea.europa.eu/ims/economic-losses-from-climate-related
[8] https://www.worldbank.org/en/topic/disasterriskmanagement/overview
[10] https://reliefweb.int/report/world/2021-disasters-numbers
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