Spain | Assessing the impact of extreme climate events: Evidence from the Valencia Floods

Summary

This note proposes a framework to estimate the employment effects of floods in Spain, combining imputed damage data with a spatial panel model. These extreme events cause job losses and regional spillovers, but timely aid mitigates them. The DANA in Valencia illustrates the frameworks' accuracy and its policy relevance.

Key points

• Key points:
• We develop a unified analytical framework to assess the macroeconomic impacts of climate-related physical acute risks, facilitating the construction of forward-looking scenarios for risk management and policymaking. Our approach uses EM-DAT as the primary source, enhancing underreported damage estimates via a non-linear model to build a proxy for economically exogenous shocks, scalable across disaster types and geographies.
• To estimate economic effects, we implement a non-linear dynamic spatial panel data model that captures both direct and spillover impacts of floods on regional employment. The model also uses insurance payouts as a proxy for financial relief to account for post-disaster recovery dynamics.
• Our results show strong non-linearities and spatial heterogeneity: extreme events have disproportionate effects, and the economic consequences vary significantly with the geographical location of the disaster.
• Applying the framework to Spain’s 2024 DANA, we estimate economic damages ranging from 0.55% to 1.71% of Spain’s GDP, depending on the assumed severity of the event. Employment impacts reach up to -2.2 percentage points in the province of Valencia and -0.2pp at the national level. Following the revision of damage figures in EM-DAT, the estimated cumulative employment impact in Valencia was adjusted to -1.4pp, closely aligning with the observed outcome of -1.6pp.
• Compensation payments, which exceed 40 % of the estimated damages, mitigate the negative impact on employment, although the recovery of the destroyed physical capital and the rebuilding of the affected parties’ balance sheets will take time.

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