Spreading the risk, sharing the burden – Economy-wide and distributional impacts of flood risk financing under climate and socioeconomic change

As climate change increases flood hazard and socioeconomic dynamics reshape patterns of exposure and vulnerability, flood risk financing strategies are under intense debate. In Austria, where floods are among the most frequent and costliest hazards, the public sector often acts as the insurer of last resort, a role increasingly challenged amidst growing fiscal stress. Proposals for mandatory risk insurance and alternative burden-sharing schemes are discussed. However, the implications of these schemes on economy-wide and within-country distributional outcomes remain poorly understood. 
This study examines the dynamic interplay of flood hazard, exposure and vulnerability and its economy-wide and distributional consequences in Austria. We ask: who bears the cost of current and future flood risk and how do alternative risk financing schemes modify outcomes under climate and socioeconomic change?
Hazard dynamics are represented through climate scenarios (RCP4.5, RCP8.5), while exposure and vulnerability evolve along socioeconomic pathways (SSP1, SSP2, SSP4), capturing dynamics in spatial development, economic growth and inequality. Methodologically, we couple high-resolution physical flood risk projections with a recursive-dynamic, single-country computable general equilibrium model for Austria, solved annually from 2015 to 2080. Flood damages are derived from GLOFRIS at 1 km resolution and matched with Austrian administrative microdata. Households are differentiated by region (urban, suburban, rural), income quartile, and flood exposure, resulting in 24 representative households. This structure enables a detailed representation of exposure patterns and vulnerability in terms of income, consumption, and recovery capacity. Flood impacts enter the model as forced reconstruction expenditures that reduce welfare-relevant consumption. We analyze three flood risk financing schemes: (i) a risk-based scheme where exposed households fully self-finance recovery, (ii) a government-supported scheme reflecting public co-financing similar to the Austrian Katastrophenfonds, and (iii) a solidarity-based scheme in which recovery costs are shared across all households proportional to income.
Results vary across regions, income groups and SSPs. Under risk-based burden sharing, flood-exposed rural households in the lowest income quartile face welfare losses of 4% in SSP2 - rising to 9% in SSP4 – while urban households lose only 0.5–1%. Government-supported burden sharing reduces regressivity by easing the burden on flood-exposed households. However, this comes at the cost of government consumption and public goods provision. Spillover effects extend to non-exposed households as reconstruction reshapes demand patterns, with impacts on relative factor prices and thus incomes. This generates indirect gains and losses that depend on households’ income composition. As a result, high-income households benefit from rising returns to capital while lower incomes relying primarily on labor and transfer income face additional pressures. Solidarity-based burden sharing distributes losses according to purchasing power rather than exposure, mitigating regressive outcomes, at the expense of GDP and aggregate welfare, highlighting a potential efficiency-equity trade-off.
By integrating flood projections with possible configurations of exposure, vulnerability and risk management strategies, the approach reveals the economy-wide mechanisms shaping within-country patterns of future flood risk.