Theodoros Zachariadis Economic Aspects of Climate Change Impacts and Adaptation Measures in the Mediterranean Some Case Studies from Cyprus Theodoros Zachariadis Dept. of Environmental Science & Technology Cyprus University of Technology E-mail: t.zachariadis@cut.ac.cy Brokerage Event of the "ENV-NCP-TOGETHER" Project, Malta, August 2012

Outline Climate change impacts in Europe & Cyprus Research results on climate change costs in: Energy consumption Residential & agricultural water use Overview of adaptation measures Discussion of specific measures for water use Pricing as an adaptation policy The importance of long term planning

Overview of climate change impacts in Europe Source: Future Impacts of Climate Change across Europe. Center for European Policy Studies (CEPS) Working Document No. 324/February 2010. www.ceps.eu/ceps/download/2972

Climate Change and Its Impacts in Cyprus Recent region-specific projections: (Hadjinicolaou, P.C. et al., Regional Environmental Change (2011) 11: 441–457) Temperature increase of 2C in summer, 1C in winter by mid-21st century Slightly reduced rainfall levels (27%) + sea level rise Effects: Increased shortage of water resources Vulnerability to desertification Damages to coastline, ecosystems & biodiversity Higher energy needs for cooling (lower for heating) Risk of decreasing tourist flows Adverse impacts on public health

Analysis of Climate Effects on Energy Use (Zachariadis T Analysis of Climate Effects on Energy Use (Zachariadis T., Energy Policy 38 (2010) 744–750) Econometric time series analysis of energy use in Cyprus by sector and fuel, 1960-2007 Energy consumption = f (income/economic activity, energy prices, time trends, climate) Climate effects captured by the variables of heating & cooling degree days (they express intensity + duration of cool & hot days respectively) Effect of climate statistically significant only for electricity consumption in households & tertiary sector

Forecast of electricity consumption up to 2030 – without climate change Electricity use triples by 2030 Increased share of domestic & tertiary sector – 86% in total

Forecast of electricity consumption up to 2030 – with climate change Assumption: uniform temperature increase by 1C in 2030, during the whole year Electricity use in 2030 higher by 2.9% (compared to ‘no climate change’ scenario) Present value of total cost in period 2008-2030: > 200 MEuros (at constant prices of year 2007) Average cost per household: ~30 Euros/year in 2020, ~80 Euros/year in 2030 (at constant prices of year 2007) Further econometric analysis + forecast of peak electricity load in summer with climate change: additional 65–75 MW in 2020, 85–95 MW in 2030 Update of forecasts up to 2050 in preparation

Effects of climate change in Cyprus on agricultural yields & production Assess variability and changes in irrigation water demand in Cyprus over the past 30 years (1981- 2008) Assess variability and changes in agricultural yields, total production the past 30 years (1981-2008) Assess potential irrigation water demand and crop production for the coming 10 years (2011-2020). (Bruggemann A. et al., Effect of climate variability and climate change on crop production and water resources in Cyprus. Final Report, July 2011, http://works.bepress.com/theodoros_zachariadis/21)

Methodology Evapotranspiration was computed using the FAO Penman-Monteith method. Blue water demand and green water use was computed for all crops based on: location (431 communities) climatic conditions crop coefficients (Kc) soil water holding capacity efficiency of irrigation method irrigation fraction (area)

(existing conditions) Data Cystat (existing conditions) CAPO (future conditions) Period 1980-2008 2010 Spatial Resolution Community level (Census 2003), annual country totals Community level No. of crops 75 (14 groups) 87 (14 groups) Temporal Resolution Yearly Climate Data 32 climate station, 70 rain stations daily data Soil Hadjiparaskevas (2005); FAO et al. (2009); ESBN (2005) Crop Parameters FAO (1998); Dept. Agriculture (surveys)

Climate Data (1980-2010)

Results Two climate scenarios up to 2020, using data of recent years with a) average and b) highest aridity ratios Average annual national crop production lower by 4143%, relative to 1980/81-2008/09 (including sustainable water management policies) Assuming constant agricultural product prices, loss of agricultural production equal to €574€602 million for 20132020 High variability in water use for different crops, locations and years  various options for climate change adaptation

Welfare losses of consumers due to reduced availability of water Methodology to assess costs of water shortages in non-agricultural sectors Willingness to pay for water p (€/c.m.) Price Water demand curve q0 q' Welfare losses of consumers due to reduced availability of water Water quantity q

Estimating Residential Water Demand in Cyprus (Zachariadis T Estimating Residential Water Demand in Cyprus (Zachariadis T., Water Vol. 2, pp. 788–814 (2010)) Data from the three Water Boards of Cyprus serving the main cities (Nicosia, Limassol, Larnaca): Billed water consumption per consumer type No. of consumers by type Water tariffs (fixed prices & prices per consumption block) Fraction of consumers in each consumption block Revenues and expenditures (from Board financial accounts) Period: 1980-2009 (annual data), 2000-2009 (data available per billing period – 2/3/4 months) Other data: Monthly temperature and rainfall (from Met. Service) Quarterly GDP & population (from Statistical Service) Household income by district of Cyprus (Family Expenditure Surveys conducted by Statistical Service)

Residential Water Demand Model qit = f (incit , pit , pfixit , tempit , rainit , dummyi) i: district (i = 1 to 3); t: 4-month period from 2000/1 to 2009/3 q: water consumption per household (c.m.) inc: household income (€) p: water price (€/c.m.) pfix: fixed part of water tariff (€) temp, rain: temperature & rainfall level (C, mm) dummy: for the period of interruptions in water supply in each city (April 2008 – December 2009) Linear function, variables in logarithms, each variable’s coefficient expresses an elasticity Two models: a) p = average price, b) p = marginal price

Econometric Estimation Typical problem with block pricing: endogeneity of prices – each consumer faces a water price that depends on the quantity consumed. Usual estimation method (OLS) will be biased Two-Stage Least Squares (2SLS) Estimation is appropriate Requires identifying instruments that correlate with price but not with dependent variable (water consumption) Three instruments were used: a) Consumer Price Index of previous year b) Water Board expenditures in previous year per c.m. of water sold c) Same expenditures in current year

Estimation Results Average price model Marginal price model Coefficients of: Income 0.529 Avg. price -0.248 Fixed tariff -0.441 Temperature 0.241 Rainfall 0.047 Dummies: Nicosia -0.034 Larnaca 0.065 Limassol -0.193 Marginal price model Coefficients of: Income 0.753 Marg. price -0.449 Fixed tariff -0.490 Temperature 0.292 Rainfall 0.061 Dummies: Nicosia -0.025 Larnaca 0.088 Limassol -0.253 N = 73 Coefficients in bold are statistically significant at 1% level

Cyprus: Costs of Water Shortages up to 2030 New desalination plants cost 400 MEuros! 1520% higher costs due to climate changed induced water scarcity

Potential adaptation measures for Cyprus Water: Proper pricing to a) encourage conservation and b) increase funds available for technical measures Agriculture: Shift to production patterns with high value and high water efficiency Tourism: Focus on non-summer visitors Energy: Improve energy efficiency of buildings Infrastructure: Invest in measures to protect roads & buildings along the coastline Forests, biodiversity & public health: Monitor vulnerable sites/species and take precautionary measures

An adaptation measure: ‘Efficient’ household water prices to account for scarcity Climate change increases water shortages modestly, requires 8-13 €cents/c.m. higher water prices to induce conservation in order to address this additional scarcity

An adaptation measure: Effects of ‘efficient’ household water pricing

Benefits of long-term planning: What if we had ‘efficient’ prices already in 2000?

Conclusions and policy implications South Europe to be adversely affected by climate change, more than any other European region Monitoring of vulnerable sites / species necessary Long-term planning has tangible benefits – both environmental and economic Proper pricing of scarce natural resources is necessary to: Encourage long-term resource conservation. People respond to incentives! Provide funds that can be used for financing climate change mitigation & adaptation measures