Evaluating the economic impact of water scarcity in a changing world

Global water scarcity is a leading challenge for human development and achieving the Sustainable Development Goals. Although often framed as a local river-basin issue, its drivers and impacts are strongly global due to trade and multi-sector interdependencies. Agricultural commodities, the primary source of global consumptive water use, are frequently traded internationally, creating teleconnections where global supply shifts affect local water systems and vice versa. Water is also a critical input to energy, transportation, and manufacturing, enabling scarcity to propagate across sectors and scales. Quantifying water scarcity impacts has traditionally emphasized physical supply metrics, but these measures may miss how economies adapt through trade, technology, and shifts in production. The economic perspective highlights that impacts arise when water becomes a binding constraint and the cost of adaptation depends on how easily systems can change (e.g., shifting crops, technologies, or importing water-embedded goods). In a globalized economy, basin- or sector-isolated analyses miss cross-regional effects. Deep uncertainties in climate, socioeconomic trajectories, technology, and policy further complicate projections and render a narrow scenario focus risky. This study asks how coupled global hydro-economic dynamics will affect future basin-level economic impacts of water scarcity, and how the magnitude and direction of these impacts depend on deeply uncertain drivers. The authors link an integrated assessment model, a global hydrologic model, and an economic surplus metric within an exploratory modeling framework to evaluate uncertainties and identify key drivers across thousands of futures.

Early water scarcity research emphasized supply-oriented indicators such as per-capita availability and withdrawal-to-availability ratios, later expanding to incorporate infrastructure and institutional capacity. Recent indicators also consider water quality, environmental flow requirements, and composite measures of water security and poverty. Work on water footprints and virtual water trade (e.g., Hoekstra and Mekonnen; Dalin et al.) has illuminated how water use and scarcity propagate through global supply chains. Qin et al. emphasized consumption flexibility to identify regions where adaptation to scarcity may be difficult. From an economic perspective, prior studies have used welfare-based measures (e.g., changes in consumer/producer surplus or equivalent variation) to assess impacts of scarcity and policy interventions; for instance, Beriheta et al. used equivalent variation to evaluate groundwater restrictions. Integrated assessments of global water scarcity (e.g., Hejazi et al.) and explorations of uncertainty in climate impact assessments highlight the importance of considering multiple coupled drivers and broad scenario ensembles rather than a limited set of narratives.

The study couples a global human-Earth system model with a global hydrologic model and evaluates basin-level economic impacts using an economic surplus metric. Modeling framework: The Global Change Analysis Model (GCAM) represents energy, land use, water demands, and biogeochemical cycles across 32 geopolitical regions, 381 land-use regions, and 235 river basins. Population and GDP trajectories are exogenous (from SSPs), while energy and land systems are simulated with competing technologies and practices. Water demand sectors include irrigation (by crop and management), livestock, manufacturing/industry, primary energy (resource extraction), electricity generation cooling technologies, and municipal uses, with demand responses to prices and technology change. Hydrology and water supply: Surface water availability (runoff, storage, routing, and evaporation) is provided by the Xanthos global hydrologic model at monthly time steps. GCAM allocates water from surface and groundwater via graded supply curves reflecting costs and constraints; groundwater curves account for aquifer characteristics and extraction costs. Environmental flow requirements and accessible runoff limits are imposed. Reservoir storage capacity is scenario-dependent (restricted: constant; expanded: linear increase to maximum storage by 2100). Price-based allocation determines a shadow price of water in each basin; absent perfect foresight, GCAM adapts myopically over time. Economic impact metric: Economic impact is defined as the change in total economic surplus (consumer plus producer surplus) relative to a baseline, capturing both direct effects of binding water constraints and indirect market responses via trade and production shifts. Physical scarcity is measured by the Withdrawal-to-Availability ratio (WTA), i.e., total withdrawals divided by renewable supply. Scenario design and uncertainties: Thousands of futures are explored varying key drivers: (1) Socioeconomics (SSPs, affecting population, GDP, inequality, agricultural productivity); (2) Land-use and mitigation policy: Universal Carbon Tax (UCT, pricing all sectors including land-use change emissions) versus Fossil Fuel and Industrial Carbon Tax (FFICT/FFIC(T), pricing fossil and industrial CO2 but not land-use change), with carbon price trajectories informed by current NDC ambition; (3) Groundwater availability limits (5%, 25%, 40% of nonrenewable groundwater economically accessible); (4) Reservoir storage pathway (restricted vs expanded); (5) Earth System Model forcings (GFDL, MIROC, IPSL, HadGEM2, NorESM1-M) providing precipitation and temperature inputs to Xanthos and thus runoff to GCAM. The analysis computes WTA and economic surplus impacts for 235 basins across approximately 3000 global change scenarios over the 21st century. Scenario discovery and drivers of tipping points are examined using Classification and Regression Trees (CART) to identify combinations of factors associated with extreme positive or negative impacts and high uncertainty amplification.

• Inter-basin trade and market adaptation can render basin-level economic impacts from water scarcity strongly positive or negative depending on scenario assumptions. Although water scarcity often induces losses in economic surplus, some basins realize gains by becoming virtual water exporters when global scarcity raises their comparative advantage. • No basin has a universally positive or negative outlook across the ensemble; water-rich basins (e.g., Orinoco) exhibit more frequent positive impacts, while many water-scarce basins experience both gains and losses depending on global context. • Physical scarcity (WTA) and economic impact are imperfectly correlated. Some high-WTA basins show modest or even positive economic impacts in certain scenarios (e.g., restricted reservoir storage), while some low-WTA basins incur negative impacts, underscoring the need to capture physical–economic interdependencies. • Economic impact variability is high in basins such as the Indus, Arabian Peninsula, and Lower Colorado, reflecting both hydro-climatic and socioeconomic uncertainties. Water-rich basins like the Orinoco show slight positive impacts in most scenarios. • Quantiles of surplus change (billions of 2020 USD) for selected basins (10th to 90th percentile): Indus: −210 to 405; Arabian Peninsula: −530 to 101; Lower Colorado River: −16.4 to 30.8; Orinoco: −2.84 to 4.96. • Market responses typically amplify hydro-climatic uncertainty: small differences in runoff (driven by ESM forcing) can lead to large swings in economic impact; ESM choice often determines impact sign. Amplification is pronounced in water-scarce basins under high-demand scenarios. • Basin-specific tipping point conditions differ: Arabian Peninsula tipping with low groundwater availability and economy-wide carbon pricing; even with ample groundwater, high population/low GDP (SSP3) with carbon pricing can trigger late-century negative impacts after mid-century gains and increased reliance on desalination. Lower Colorado tipping under low groundwater availability, low agricultural productivity (SSP3 ag/land use), and high-wealth trajectories (SSP5). • Mitigation–scarcity trade-offs: Under UCT, pricing land-use change discourages agricultural expansion and induces intensification, increasing irrigation and withdrawals and raising water shadow prices (e.g., higher water price and withdrawals in Indus; higher withdrawals in the Arabian Peninsula). Under FFICT/FFIC(T), greater cropland expansion occurs globally. • Extremes of negative economic impact (billions of 2020 USD) include: Red Sea–East Coast −1106 (2100, SSP5, GW 25%, restricted storage, NorESM forcing, UCT); Indus −5447 (2100, SSP3, GW 40%, expanded storage, IPSL, UCT); Sabarmati −3008 (2100, SSP5, GW 50%, restricted, GFDL, UCT); Ganges–Brahmaputra −2405 (2020, SSP4, GW 5%, restricted, MIROC, UCT); Arabian Peninsula −2357 (2100, SSP5, GW 5%, restricted, MIROC, UCT). • Many impactful scenarios combine elements across SSP dimensions rather than aligning neatly with a single narrative, highlighting the value of exploratory modeling and scenario discovery to reveal basin-specific drivers.

The findings demonstrate that water scarcity’s economic impacts are emergent properties of coupled human–Earth systems where global trade and sectoral interactions can either mitigate or exacerbate local scarcity. By using an economic surplus metric, the study captures how scarcity-induced price changes, production shifts, and trade reallocate welfare across regions, complementing physical scarcity metrics that alone cannot reveal virtual water exporter dynamics. The strong amplification of hydro-climatic uncertainty through market responses means that small differences in climate forcings can translate into large, uncertain economic outcomes, especially for already water-stressed basins. Basin-specific tipping points arise from distinct combinations of groundwater constraints, socioeconomic trajectories, agricultural productivity, and mitigation policies, implying that uniform policy narratives may overlook critical local vulnerabilities. The mitigation–scarcity trade-off under UCT illustrates how pricing land-use emissions can unintentionally intensify irrigation demand, increasing water stress in certain basins even as overall land-use emissions fall. These insights address the research question by showing when and why basins may benefit or suffer economically under future scarcity and by identifying the drivers and policies that most influence these outcomes. They underscore the need for robust, adaptive water resource management and integrated planning that anticipates cross-sector and cross-region feedbacks.

This study links a global human–Earth system model, a global hydrologic model, and an economic surplus metric within an exploratory framework to assess basin-level economic impacts of water scarcity across thousands of uncertain futures. It shows that: (1) basins may experience positive or negative economic impacts depending on their adaptive capacity and comparative advantage; (2) market responses can amplify hydro-climatic uncertainty, leading to large variations in economic outcomes; and (3) mitigation policy design, particularly pricing land-use change, can shift the balance between land expansion and intensification, with important implications for irrigation water demand. The work cautions against relying on a narrow set of global narratives and emphasizes scenario discovery to identify basin-relevant drivers and tipping points. Future research should incorporate fuller economy-wide interactions via computable general equilibrium models, improve representation of water institutions and allocation rules, enhance groundwater dynamics and foresight in decision-making, and extend scenario discovery to additional basins and cross-sectoral stressors to inform robust, context-specific water and climate policies.

The modeling assumes stylized, efficiency-oriented water markets with equal access for agents and limited institutional constraints, which may over- or underestimate real-world allocation and distributional effects. GCAM lacks perfect foresight, potentially biasing short-term decisions. Baseline-validated water price levels are not explicitly represented; water is valued via shadow prices, and agricultural water is treated with implicit subsidies, simplifying sectoral water rights and priorities. The framework does not employ a full computable general equilibrium model, so some economy-wide interactions and feedbacks are not captured. Groundwater availability constraints and reservoir capacity pathways are simplified and scenario-based. Results are sensitive to Earth System Model forcings and SSP assumptions; although a wide ensemble is used, structural uncertainties in models persist. The assumption that food demand is always met can mask extreme scarcity outcomes and may shift the balance between expansion and intensification in ways that differ from real-world constraints.