Quantifying the economic impact of extreme climate events: evidence from Valencia's floods

Summary

This paper presents a methodological framework to quantify the economic impact of natural disasters. It estimates a damage function and measures employment effects using a dynamic spatial model. The 2024 DANA in Valencia validates the approach and highlights the importance of both location and compensation mechanisms.

Key points

• Key points:
• The damage function of floods is clearly non-linear: the economic impact does not increase proportionally, but only the most extreme events —the top 5%— generate significant losses.
• Employment effects also display non-linearities. While moderate floods barely affect labor markets, extreme episodes lead to immediate declines in employment growth of up to −2.8 percentage points in directly affected provinces.
• Moreover, the economic impact is not confined to the hit areas. Indirect effects spread through trade and supply chains, amplifying the overall losses across the country.
• The 2024 DANA in Valencia caused damages estimated at 0.65% of national GDP. Our projections indicate a provincial employment decline of approximately −1.4 percentage points (pp), in line with the −1.5 pp observed. At the national level, the impact was smaller (−0.2 pp). In any case, geographic location is crucial: a climatologically similar event striking an area with greater economic weight and stronger interconnections to the rest of the country could double the aggregate effect.
• Compensation payments from the Insurance Compensation Consortium, which covered 60–80% of the losses, accelerated the recovery. Within five months, employment in Valencia exceeded pre-disaster levels, with the effect of these transfers being 2.5 times stronger than the initial negative shock, underscoring the importance of rapid and well-targeted responses.

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