System-Wide Impactsof a Specific Extreme Event

Alvaro Calzadilla

eee Programme - Seminar (November 15, 2005)

System-Wide Impacts of a Specific Extreme Event

The general objective:

“To show the overall economic cost of a natural disaster paying special attention to the market effects”

“ To show that the economic burden of a natural disaster is not confined to the region where the disaster physically occurs”

Outline:

- Natural disaster analysis

- Flooding in Australia in 1998

- Simulation and results

- Conclusion

System-Wide Impacts of a Specific Extreme Event

System-Wide Impacts of a Specific Extreme Event

Natural disaster analysisEconomic and insured losses with trends (Munich RE, 2003)

EXTREME WEATHER EVENT:

Extreme weather is defined as weather that exceeds a locale’s normal weather intensity. By definition, it is infrequent or rare, and it will vary from location 1 to location 2

Extreme weather can be represent as a score of “extreme high” (95th, 98th or 99th percentiles) or “extreme low” (5th, 2nd or 1st percentiles) for a location

System-Wide Impacts of a Specific Extreme Event

Natural disaster analysis

NATURAL DISASTER:

A natural disaster is often the coalescence of two or more extreme events

An extreme weather event can become a disaster when the damage resulting from the event is beyond the capacity of a community to cope

System-Wide Impacts of a Specific Extreme Event

Natural disaster analysis

Direct Effects:

Losses of capital stock

Indirect Effects:

Business interruption

Macroeconomic Effects:

Loss of GDP, etc.

Humanitarian Effects

Ecological Effects

Economic Costs

Disaster

Impacts

System-Wide Impacts of a Specific Extreme Event

Natural disaster analysis

Impacts of natural disaster (ECLAC)

Economic Cost

Social Sectors:• Affected population• Housing and human settlements• Education and culture• Health Sector

System-Wide Impacts of a Specific Extreme Event

Natural disaster analysis

Infrastructure• Energy• Drinking water and sanitation• Transport and Communication

Economic Sectors• Agriculture• Trade and industry• Tourism

Impacts of natural disaster (ECLAC)

Direct Damage: Physical impact on infrastructure- Total o partial destruction of housing, buildings, installations, machinery, equipment, means of transportation, storage and furniture.- Damage to cropland, irrigation works and dams.- Destruction of Crops ready for harvesting.

Indirect Damage: Business interruption- Loss of production of goods and services resulting from the destruction of the means of production.- Loss of industrial output as a result of damage to factories or lack of inputs and increased transport cost.

Macroeconomic: Secondary effectsLoss in GDP, balance of trade, balance of payments, taxes, expenditure, etc

Economic Costs (ECLAC Methodology)

System-Wide Impacts of a Specific Extreme Event

Natural disaster analysis

System-Wide Impacts of a Specific Extreme Event

Natural disaster analysisLOSS CATEGORY EXAMPLE

Disruption of business Manufacturing productionRetail distribution officeLeisure services

Disruption of networks Comunications(Public services) Road traffic

Other trafficPublic utilities

Water supplySewerage and sewerage treatmentGasElectricityTelecommunications

Computer control systems

Disruption of households Additional heating / drying out costsOther miscellaneous costs

Emergency service costs Local governmentPoliceFire BrigadesAmbulance servicesFlood defence agenciesMilitary aidVoluntary services

The ECLAC methodology does not take into account the market effect in which the productive sectors may incur.

MARKET EFFECT:

The changes in the relative competitiveness caused by a natural disaster

These changes are driven by changes in prices

System-Wide Impacts of a Specific Extreme Event

Natural disaster analysis

This section is based in Yen (2002) “Flooding in Australia: A Review of Events in 1998”

Yen’s paper reviews the diverse causes and styles, the frequency and the losses of Australia’s five most costly floods in 1998 (Townsville, Katherine, East Gippsland, Namoi Valley and Wollongong)

System-Wide Impacts of a Specific Extreme Event

Flooding in Australia

System-Wide Impacts of a Specific Extreme Event

Flooding in Australia

Katherine

Townsville

East Gippsland region

Namoi Valley region

Wollongong

TONWSVILLE (Jan):

- Rainfall > 100 Yr ARI

- Flood highest on record

KATHERINE (Jan):

- Rainfall > 100 Yr ARI

- Flood ~ 150 Yr ARI

EAST GIPPSLAND (Jun):

- Flood highest on record

NAOMI VALLEY (Jul):

- Flood 20 Yr ARI

WOLLONGONG (Aug):

- Rainfall > 100 Yr ARI

- Flood ~ 50 Yr ARI

System-Wide Impacts of a Specific Extreme Event

Flooding in Australia

Flood event Total estimated costs Insured loss Deaths Injuries(US$ million) (% of total)

Townsville 129.2 33% 2 40Katherine 123.0 35% 3 50East Gippsland region 48.0 negligible 1 n/aNamoi Valley region 163.0 negligible 2 5Wollongong 76.9 34% 1 37

TOTAL 540 21% 9 132

Tangible and intangible damages from the 1998 floods

Economic Cost(Direct effect)

HumanitarianEffects

System-Wide Impacts of a Specific Extreme Event

Flooding in Australia

Tangible damages from the 1998 floods

Item Cost (US$ million) Shock classification

Buildings 11.2 CapitalInfrastructure repairs 142.9 CapitalAgriculture 97.4

Cattle dead or missing 20.4 CapitalSheep dead or missing 5.9 CapitalFencing lost 19.1 CapitalFencing damaged 15.5 CapitalFodder loss 1.3 CapitalPasture requiring renovation 13.9 LandCrop loss 16.5 LandDamage plant and equipment 4.7 Capital

Stream damage 276.0 CapitalRelief payments 12.5 --

TOTAL 540.0

Capital losses 497.0Land losses 30.5

To model the effects of Australian floods, the GTAP-EF model is run by shocking the exogenous variables “capital endowment” and “land endowment” in region RoA1 (to which Australia belongs).

The result is a counterfactual scenario, in which the world economy adjusts its structure, as a consequence of the reduction of productive resources in one region.

System-Wide Impacts of a Specific Extreme Event

Simulation and results

System-Wide Impacts of a Specific Extreme Event

Simulation and resultsIndustry Output (Change, millions 1997 US$)

USA EU EEFSU JPN RoA1 EEx CHIND RoWRice 0.0 0.1 0.0 0.7 -0.4 -0.3 -0.1 -0.1Wheat 5.5 5.1 0.4 0.7 -21.7 8.2 2.9 3.1CerCrops 3.5 4.3 0.5 1.1 -23.9 3.5 2.5 3.7VegFruits 5.1 5.8 0.7 3.3 -41.6 4.1 2.1 5.9Animals 10.4 13.7 1.5 0.9 -56.8 3.7 2.9 4.4Forestry -0.4 -0.2 -0.1 0.0 -6.9 -0.3 -0.2 -0.2Fishing 0.0 -0.3 0.0 0.0 -0.7 -0.2 -0.2 -0.2Coal -0.1 0.0 0.0 0.0 -1.7 0.0 -0.1 0.0Oil -0.2 -0.2 -0.1 0.0 -5.1 -1.3 -0.1 -0.1Gas 1.3 0.2 0.8 0.0 -7.4 0.5 0.0 0.0Oil_Pcts 0.9 0.4 0.4 0.3 -12.0 0.6 0.0 0.3Electricity 2.4 2.4 1.1 0.8 -42.5 0.2 0.3 0.8Water 0.0 0.1 0.0 0.0 -6.1 0.0 0.0 0.0En_Int_ind 1.4 5.9 2.3 9.4 -124.3 2.1 -1.2 2.1Oth_ind 12.3 23.3 1.9 22.8 -369.9 -7.4 -6.4 -7.1MServ -28.5 -40.0 -5.1 -24.0 -403.4 -15.8 -8.6 -15.0NMserv -0.1 -5.6 -0.3 0.1 -51.3 -1.4 0.1 -0.2CGDS -50.5 -54.5 -8.9 -36.6 -12.6 -24.5 -10.1 -20.8

Looses in Primary Factors (millions 1997 US$)USA EU EEFSU JPN RoA1 EEx CHIND RoW

Land 0 0 0 0 30 0 0 0Lab 0 0 0 0 0 0 0 0Capital 0 0 0 0 497 0 0 0NatlRes 0 0 0 0 0 0 0 0

Losses in GDP (millions 1997 US$)USA EU EEFSU JPN RoA1 EEx CHIND RoW

GDP 89 68 11 63 397 23 0 13

Indirect Effects(1188 MM USD)

Macroeconomic

Direct Effects(527 MM USD)

Macroeconomic

System-Wide Impacts of a Specific Extreme Event

Simulation and resultsIndustry Output (Change, millions 1997 US$)

USA EU EEFSU JPN RoA1 EEx CHIND RoWRice 0.0 0.1 0.0 0.7 -0.4 -0.3 -0.1 -0.1Wheat 5.5 5.1 0.4 0.7 -21.7 8.2 2.9 3.1CerCrops 3.5 4.3 0.5 1.1 -23.9 3.5 2.5 3.7VegFruits 5.1 5.8 0.7 3.3 -41.6 4.1 2.1 5.9Animals 10.4 13.7 1.5 0.9 -56.8 3.7 2.9 4.4Forestry -0.4 -0.2 -0.1 0.0 -6.9 -0.3 -0.2 -0.2Fishing 0.0 -0.3 0.0 0.0 -0.7 -0.2 -0.2 -0.2Coal -0.1 0.0 0.0 0.0 -1.7 0.0 -0.1 0.0Oil -0.2 -0.2 -0.1 0.0 -5.1 -1.3 -0.1 -0.1Gas 1.3 0.2 0.8 0.0 -7.4 0.5 0.0 0.0Oil_Pcts 0.9 0.4 0.4 0.3 -12.0 0.6 0.0 0.3Electricity 2.4 2.4 1.1 0.8 -42.5 0.2 0.3 0.8Water 0.0 0.1 0.0 0.0 -6.1 0.0 0.0 0.0En_Int_ind 1.4 5.9 2.3 9.4 -124.3 2.1 -1.2 2.1Oth_ind 12.3 23.3 1.9 22.8 -369.9 -7.4 -6.4 -7.1MServ -28.5 -40.0 -5.1 -24.0 -403.4 -15.8 -8.6 -15.0NMserv -0.1 -5.6 -0.3 0.1 -51.3 -1.4 0.1 -0.2CGDS -50.5 -54.5 -8.9 -36.6 -12.6 -24.5 -10.1 -20.8

Looses in Primary Factors (millions 1997 US$)USA EU EEFSU JPN RoA1 EEx CHIND RoW

Land 0 0 0 0 30 0 0 0Lab 0 0 0 0 0 0 0 0Capital 0 0 0 0 497 0 0 0NatlRes 0 0 0 0 0 0 0 0

Losses in GDP (millions 1997 US$)USA EU EEFSU JPN RoA1 EEx CHIND RoW

GDP 89 68 11 63 397 23 0 13

Local impacts of an specific extreme event propagate inside the world economic structure, because of trade relationships among regions

In this specific exercise if we do not consider the overall impact we would underestimate the global economic impact by 18.8%

System-Wide Impacts of a Specific Extreme Event

Conclusions

It is important to consider the market effect inside the indirect effect, because it can determine permanent losses in the international market shares

The reconstruction cost following a Natural Disaster must prior the sectors with a high level of market effect

System-Wide Impacts of a Specific Extreme Event

Conclusions