Pan-Canadian Hydro-Economic Model to Study the Economy-Wide Impacts of Climate Change and Water Markets as a Coping Mechanism

Abstract

Canada’s economic development and long-term sustainability require having access to water in adequate quantity and acceptable quality. Despite Canada being abundant on water resources, assessing the effect of future water challenges on its economy is crucial for the design of adaptation and mitigation strategies and to timely inform society and spark the behavioral changes needed.

The Pan-Canadian hydro-economic model presented here represents an improvement from previous macro-economic modeling in GWF of water resources management. This model iteration contains a more thorough description of the macro-economic variables and is, therefore, capable of describing more realistic responses such as technology change and factor substitution.

The model is based on general equilibrium theory where the economy is modelled as an open system and constrained by an accounting balance. Water is introduced as a factor of production for industries and as a commodity for consumption. Crop production is divided into irrigated and rainfed production. Other water-relevant industries and commodities are explicitly modelled.

Consistent with GWF’s goal of developing decision-making tools for water-associated risks, the model presented here is used to examine the effect of having Canada-wide water supply shocks due to climate change and to explore the benefits of implementing a water market as a mechanism to cope with such adverse events.

Results show the Canadian economy is most sensible to water disruptions to the paper manufacturing and irrigated crop production industries among the large water consumer industries. Overall, it was found that water supply variations have a relatively small effect on the Canadian economy, but that it responds more pronouncedly to shortages than to exceedances on water endowment.

Implementing a water market across Canada has the effect of balancing out the economic costs that otherwise industry-specific water disruptions would produce. This effect acts in both directions, damping the economic loss due to water cutbacks but also the gains from increasing the water endowment.

Another insight from the model runs is the linkage between water availability and trade balance, which indicates that when water becomes scarce and its price increases, the production of domestic water-intensive commodities becomes costlier. These commodities then must be satisfied on foreign markets, which amplifies the trade deficit on the economy.

Current work aims at disaggregating the model following the major drainage basin areas to allow spatially targeted scenarios.