What if the Dutch started worrying about flood risk?

Trond Husby summarizes his YSSP project, in which he analyzed the macroeconomic impacts on the Dutch economy that would occur if there were a partial shift in the allocation of risk from the public to the private sector.

T. Husby

T. Husby

Introduction

The Netherlands is one of the most flood-prone countries in the world. Its current flood risk management strategy involves a combination of high safety standards and an ex post compensation mechanism, namely, the public sector has assumed all risk. Projected effects from climate change, including sea level rise and increased river discharge, has led to a rethink of flood risk management strategy. A particular concern is that the current strategy provides few incentives for individual mitigation efforts. This is worrying, as increasing concentration of population and assets in areas at risk is a main driver of disaster losses.

Research question and methodology

In this study we wish to analyze the macroeconomic impacts on the economy from a partial shift in the allocation of risk from the public to the private sector. We make use of a recursively dynamic Spatial Computable General Equilibrium model for the Netherlands (RAEM-E3) where the inter-temporal dynamics are driven by capital accumulation due to investments. We modify investment decisions such that they take into account disaster risk. As investment decreases in risky regions, productive activities are relocated to less risky regions. These relocations trigger labor migration as workers move to regions where they can find employment. In a second step we investigate how the shift in allocation of risk affects disaster losses and welfare. This is carried out by simulating a flood for the following two scenarios: (i) the government assumes all risk (risk is implicit); (ii) flood risk is taken into account in investment decisions (risk is explicit).

Results and conclusion

Our results suggest that shifting the allocation of risk from the public sector to the private sector leads to a reduction in productive activities as well as in population in risky regions, but the migration movements are of a much smaller scale than the reductions in production. The reason is that the initial migration of workers from risky areas lowers housing demand which again reduces prices. Workers who stay are therefore partly compensated for the loss in job opportunities with lower housing prices. Our flood simulations yield quite different results for the two scenarios. In scenario (i), the flood causes a large reduction in aggregate output as well as welfare reductions spread over the whole country. In scenario (ii), the loss in aggregate output is recovered within 2 years. Welfare losses are concentrated in the affected region, but are of a far larger magnitude than in scenario (i). We conclude that the partial shift in allocation of risk to the private sector reduces disaster losses, but it also inflates welfare losses in affected areas.

Note

Trond Husby, of the Institute for Environmental Studies, VU, Amsterdam, is a Norwegian citizen, residing in the Netherlands. He was funded by IIASA's Norwegian National member Organization and worked in the Risk, Policy and Vulnerability (RPV) Program during the YSSP.

Please note these Proceedings have received limited or no review from supervisors and IIASA program directors, and the views and results expressed therein do not necessarily represent IIASA, its National Member Organizations, or other organizations supporting the work.


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Last edited: 19 August 2015

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