Economic impact of a drought through the integration of hydro-economic and macroeconomic models

The global demand for freshwater has been steadily increasing, aligning with the growth of the world population, the rise in new demands in other economic sectors, and the supply decrease as a consequence of climate change. This trend has resulted in elevated consumption rates. The closure of river basins further intensifies water shortages, necessitating effective demand-side policies, particularly in agriculture. The allocation of water rights is crucial in managing limited water resources. The integration of hydro-economic modeling, a tool combining biophysical and socioeconomic factors, aids in water resource planning and policy formulation.

The primary objective is to analyze the effects of linking a hydro-micro-economic model with a macro-economic model. The study focuses on the Guadalquivir River Basin (GRB) in southern Spain, using a hydro-economic model and a Computable General Equilibrium (CGE) model for the Andalusian economy. The models are interconnected, providing insights into the feedback between the agroeconomic sector and the regional economy.

The hydro-economic model comprises nodes representing the hydrological system and economic agents with agricultural and urban water demands. Agricultural demands are calibrated using Positive Mathematical Programming to simulate farmers adapting to water scarcity. The CGE model, calibrated at a regional level, addresses macroeconomic aspects. The models exchange information on commodity prices and land use changes.

The study applies the Drought Management Protocol of the GRB, reducing water inflow in the basin by 25%. In this way, results indicate that the macroeconomic model mitigates the economic impact of reduced crop area due to drought by increasing prices. Thus, it is demonstrated that from the producer's perspective, more is gained due to this price effect, resulting in an increase of up to 4.5% in the producer's gross margin. The coupling of models enables a comprehensive understanding of the economic effects of drought, taking into account both micro and macroeconomic perspectives. This effect cannot be observed without the linkage to the macro model when considering only the hydro-economic model.

In conclusion, the coupling of a hydro-economic model and a macro-economic model proves effective in addressing changes in commodity prices resulting from drought-induced reductions in crop areas. This integration attenuates the economic impacts of drought by accounting for the price effect.