Global water scarcity is a critical challenge, exacerbated by climate change, population growth, and globalization. Traditional assessments often focus on local river basins, neglecting the global nature of water's drivers and impacts. Agricultural commodities, a primary water consumer, are traded globally, meaning supply changes in one region impact others. Similarly, water's importance in energy, transportation, and manufacturing creates multi-sectoral, multi-scale dynamics. Quantifying water scarcity's impacts is complex, with past research emphasizing supply-oriented metrics like per-capita availability. More recent work considers water quality, availability, and environmental flow requirements. However, these approaches often overlook the economic costs associated with adapting to scarcity. This research addresses the gap by assessing the loss (or gain) of economic surplus due to water scarcity across a range of scenarios, considering the complex interplay of physical and economic factors in a globalized world. The central research question is how these dynamics will impact society in the future, and how impacts depend on deeply uncertain conditions.

Early studies on water scarcity focused on supply-side metrics, such as per capita availability and the ratio of water use to available water. More recent research incorporates indicators like water quality, availability, and environmental flow requirements, providing a more holistic view of scarcity. Qin et al.'s work highlights the role of consumption flexibility in adapting to scarcity, while also considering water footprints to trace the propagation of scarcity across sectors and regions. Economic perspectives on water scarcity emphasize the costs associated with obtaining water resources, including barriers to entry for potential users. Adaptation strategies, such as trade and shifts in production patterns, incur costs that are not reflected in traditional water scarcity metrics. The impact of adaptation in a globalized economy cannot be assessed locally, as hydrologic changes in one region have repercussions worldwide. This study aims to address this by using a global, coupled hydrologic-economic model to analyze the economic impacts of water scarcity.

This study uses a coupled global hydrologic-economic model to analyze the economic impacts of water scarcity. The model integrates the Global Change Analysis Model (GCAM), a human-Earth system model, with a global hydrologic model and an economic surplus metric. GCAM represents the world in detail with geopolitical regions, land-use regions, and numerous variables covering energy, water, and biogeochemical cycles. Water demand is modeled sectorally (agriculture, livestock, manufacturing, energy, urban), incorporating factors like crop revenue, livestock density, energy production, and population. Water supply is modeled using surface water and groundwater, considering renewable and nonrenewable sources and infrastructure limitations. The model accounts for various factors including population growth, GDP, technological efficiencies, and water prices. The economic surplus metric quantifies the value added or societal welfare gained from economic activity, capturing how the benefits of water scarcity propagate across sectors and regions. The study analyzes 3000 global change scenarios, considering various uncertainties in climate, population, technology, and policy. The scenarios vary parameters like groundwater availability, reservoir storage, Earth System Model forcing, and carbon tax regimes (Universal Carbon Tax (UCT) vs. Fossil Fuel and Industrial Carbon Tax (FFICT)). The Classification and Regression Tree (CART) algorithm was used to identify the most relevant factors influencing economic impacts in different basins.

The study analyzed 3000 global change scenarios across 235 river basins, calculating both physical water scarcity (using the Withdrawal-To-Availability ratio, WTA) and economic impact (change in total economic surplus). Results reveal that basin-level water scarcity can lead to either economic benefits or detriments, depending on adaptive capacity and comparative advantage. The study found that: (1) Basin-level economic impacts are highly dependent on specific uncertainty factors. For example, in the Lower Colorado Basin, the worst economic outcomes are linked to limited groundwater and high population growth, while in the Indus Basin, global policies impacting land-use change are crucial. (2) Land-use policies often interact with water consumption sustainability. In the Indus Basin, limiting agricultural expansion leads to intensification and unsustainable groundwater overdraft. (3) The nonlinear nature of water demand amplifies climate uncertainty, with small runoff changes resulting in large swings in economic impact, particularly in water-scarce basins under high-demand scenarios. The analysis highlighted that the correspondence between physical water scarcity (WTA) and economic impact is not perfect. Some water-scarce basins show resilience due to adaptive capacity. High-variance basins (Indus, Arabian Peninsula, Lower Colorado) exhibit both wide ranges of physical scarcity and economic impact. The Orinoco basin, being water-rich, experienced slightly positive economic impacts in most scenarios, showcasing its potential as a virtual water exporter. Analysis revealed that market responses to water scarcity amplify hydro-climatic uncertainty, leading to greater economic impact variation. The study showed that tipping points varied across basins. In the Arabian Peninsula, low groundwater and carbon pricing triggered tipping points, while in the Lower Colorado, low groundwater, low agricultural productivity, and high wealth levels did. Pricing carbon emissions from the land-use sector often creates economic tipping points by encouraging agricultural intensification and increased irrigation, exacerbating scarcity. A universal carbon tax discourages land expansion and encourages intensification, leading to increased water withdrawals. The study showed that most impactful scenarios are complex combinations of SSP dimensions, highlighting the limitations of using a few narrative scenarios in water scarcity studies. Every factor varied was found to be most influential in at least one basin, underscoring the need for scenario discovery approaches.

This study demonstrates that economic impacts of water scarcity are not simply a function of physical scarcity but are complexly influenced by adaptive capacity, market dynamics, and global trade. The findings challenge traditional approaches that focus solely on physical metrics. The significant amplification of climate uncertainty through market responses highlights the need for robust water resource management, particularly in politically unstable regions exhibiting high variability in economic impacts due to climate change. The interactions between land-use policies and water scarcity, particularly the effects of carbon pricing, need further investigation. The identification of basin-specific tipping points underscores the importance of tailored adaptation strategies and policies. The study’s use of a scenario discovery framework showcases its advantages over traditional approaches that rely on a limited set of pre-defined scenarios.

This study provides a novel and comprehensive analysis of the economic impacts of water scarcity, highlighting the importance of considering economic and market dynamics in addition to physical scarcity. The findings emphasize the need for integrated, multi-sectoral, and globally informed water resource management strategies to address the complexities of water scarcity in a changing world. Future research could focus on refining the model's representation of water markets using a computable general equilibrium model, further investigating the interplay between land-use policies, carbon pricing, and water scarcity, and exploring more detailed representation of basin-specific socioeconomic and political factors.

The study relies on model simulations, which inherently involve simplifications and uncertainties. The representation of water markets in GCAM might over- or underestimate real-world conditions. The study focuses on economic surplus as a metric, which might not capture all relevant aspects of water scarcity's societal impacts. The analysis considers a large number of scenarios but may still not encompass all potential future pathways and interactions of complex systems.