Climate Change-Induced Water Scarcity Risk for the Global Trade Network

Climate change is projected to have significant impacts on the availability of water resources around the globe. The IPCC AR5 and other studies building on ensembles of climate and hydrological models have pointed to the... [ view full abstract ]

Climate change is projected to have significant impacts on the availability of water resources around the globe. The IPCC AR5 and other studies building on ensembles of climate and hydrological models have pointed to the uneven impacts of climate change on global water resources, with renewable water resources decreasing in subtropical regions and increasing in higher latitudes. While an immediate concern is water security of the population living in areas getting drier, an often neglected aspect is the induced risk to the global economic system.

Although virtual water trade has contributed to the alleviation of water stress in many parts of the world, it has also been revealed to exacerbate water scarcity in some river basins, since the property right of water resource is notoriously difficult to delineate and water prices hardly reflect the marginal value of water. Therefore, if water availability becomes lower in already water-stressed regions under climate change, production losses in water-using sectors such as agriculture and power generation are likely to occur. In the increasingly interconnected global economy, this may consequently lead to cascading impacts to the global trade network.

In this study, we investigate how climate change may affect the global trade system through decreasing water supply (in some regions). First, we quantify local water scarcity risk (i.e., potential direct production loss due to water scarcity) for each sector in each nation, combining information on 1) projection of water resource changes in the relevant nation, 2) current water stress of the nation (from FAO Aquastat), and 3) water use and economic output of the sector (from environmental satellite accounts of multi-region input-output (MRIO) database such as Eora and WIOD). The water projection data are taken from the WRI Aqueduct database, which is based on ensembles of CMIP5 models and covers average water resources changes from the baseline period to the future period of 2030-2050. Second, we evaluate the cascading impacts on the global trade system using MRIO models, identifying both nations and sectors which may have the largest rippling effects on global trade through direct production losses due to climate change-induce water scarcity, and nations and sectors that may suffering production losses transmitted through international trade.

This study identifies and quantifies a novel channel through which climate change can impact human society. The ‘hotspots’ identified in this study can be largely invisible to relevant parties, due to the sheer complexity of the global trade network and the uneven distribution of water availability and demand across the world. We anticipate our findings will help strengthen the resilience of the global trade network under the uneven climate change-induced impacts on water resources, through guiding water-related investments of international institutions, foreign investments of firms, and the choices of upstream suppliers in critical sectors.