Climate change impacts in the Mediterranean: a CGE analysis

This report presents an analysis developed by ICES, a recursive-dynamic Computable General Equilibrium (CGE) model, applied to assess economically a set of climate change impacts. The analysis has been developed within the EU FP6 Circe project. More specifically, the present analysis considers three climatic impacts estimated for the IPCC A1b SRES scenario: land and capital losses due to the increase in sea level, changes in households’ energy demand (both for heating and cooling purposes) as a response to the increasing temperature and changes in tourism services demand as a response to changes in country climatic attractiveness. In 2050, jointly considered, these impacts can induce a loss of the 1% of GDP in the Mediterranean area as a whole. Particularly adversely affected are Cyprus and Albania (-1.6% and -2.4% of GDP respectively). It also emerges that Northern-Mediterranean are clearly less vulnerable than the Southern-Mediterranean countries. Among the former the average loss in 2050 is the 0.5% of GDP, while among the latter this more than doubles. In terms of impact types, tourism and sea-level rise are the most threatening, while GDP impacts induced by demand recomposition of energy use is less of an issue and often positive Climate change impacts trigger many indirect effects. Energy prices decline compared to the baseline (-7% oil and oil products, -4% gas in 2050), as the net effect of the GDP decrease worldwide compresses particularly energy demand. Industry and services’ prices remain roughly constant at the baseline levels. Agricultural prices, affected by the decrease in available productive land, increase especially after 2025 (the maximum increase shown by rice with a +1.5% in 2050) when sea-level rise becomes more appreciable. This has an implication on international competitiveness as typically measured by terms of trade effects. North Africa and Middle East countries, as energy exporters are particularly damaged, while EU countries which are heavy energy importers and food exporters benefit. These “second order” effects thus hamper the negative impacts in the Southern and Eastern Mediterranean countries, but smoothen that in the Euro-Mediterranean ones. Consistently with the GDP contraction worldwide, at the industry level negative signs prevail. Within the Mediterranean countries, sectoral production is adversely affected mainly in the market services and in the energy sectors. The first are hit negatively by the reduction in tourism demand, the second by the world reduction in energy demand. However electricity production tends often to increase. This is fostered by the increased space cooling demand from households that counterbalances the decrease in aggregated demand. Food production fostered by higher prices tend to increase in the Mediterranean area. Some fundamental qualification of our results are in order: the GDP impacts shown are calculated only on a sub set of potential adverse effects of climate change (possible consequences of increased intensity and frequency of extreme weather events and of biodiversity losses for instance are not included); irreversibilities or abrupt climate and catastrophic changes to which market driven adaptation can be only limited are neglected; costless and instantaneous market adjustments are assumed. In the light of all that, what proposed here should be taken just as the lowest possible bound for climate change costs.