In an article for the Guardian’s Global Development Professionals Network, CDKN’s Elizabeth Gogoi outlines the economic cost of climate change in Nepal.

In Banke district along the West Rapti river basin in Nepal, farmers have noticed that floods are coming more often, and with greater intensity. Flooding has always been part of the annual cycle of life here, but the last 40 years have seen 12 abnormally large floods that have eroded land and wiped out crops and buildings. Each major flood costs the average household the equivalent of US$9,000. In a desperately poor country such as Nepal, where average household annual income in 2011 was US$2,700 (using 2011 exchange rates), these floods are a huge financial burden. The floods also bring water-borne diseases such as cholera and typhoid, putting lives at risk – particularly of the elderly and children.

This story is replicated across Nepal. Between 1983 and 2010, floods have every year on average resulted in 283 deaths, 8000 homes destroyed and 29,000 families affected.

These statistics mask many thousands of individual stories of suffering. It is hard to put a price on human tragedy. But, the reality is that after a bad flood, the lost income, hospital bills and cost of re-building homes not only hurts the affected families but also dents Nepal’s economy as a whole.

The economics of climate change in Nepal

A new study recently published by the Government of Nepal with support from the Climate Development Knowledge Network (CDKN) puts an economic price tag on these floods and other risk areas for today, and in the future.

It finds that if you include both direct costs (e.g. damage to property and infrastructure) as well as health and welfare impacts, the total annual costs of these floods is currently an average US$232 million per year, equivalent to 0.8% of national GDP.

Looking to the future, the situation is expected to get even worse. The climate in Nepal is already changing, with higher temperatures and more erratic rainfall patterns. These trends appear to continue and even increase. For example, the study used downscaled climate model simulation projections for Nepal (focusing on a medium-high global emission scenario) and found temperature increases of 3-5⁰C by the end of the century. For those in Nepal already struggling to survive and make a living in today’s climate, this is an alarming warning.

A quarter of the population in Nepal lives in poverty. The daily grind of poverty means families finding the money to send their children to school, affording nutritious food and paying for healthcare is never easy. The Government has pledged to improve their quality of life and increase such human development indicators.  But, this requires resources and for the economy to grow significantly. The Government’s ambitious targets for economic growth (including graduating from Least-Developed to Developed Country status by 2022) is according to the findings of the economic impact assessment of climate change in Nepal potentially at serious risk.

Two of the major drivers of economic growth in Nepal are the agriculture and hydro-electricity sector. Both of these will be significantly affected by climate change in the future.

Around three quarters of Nepal’s population relies on agriculture for income, and it contributes 1/3 to the country’s GDP. By the 2070s, climate change is projected to lead to a net decrease in crop productivity and resulting high economic costs, estimated at US$140 million/year (current prices, undiscounted), equivalent to around 0.8% of current annual GDP.

Hydroelectric plants provide around 90% of total electricity in the country and are expected to be a key driver for achieving Nepal’s economic growth targets. The Government’s 2030 Development Vision anticipates a structural shift in the economy away from agriculture and towards electricity, gas and water with hydro-power exports being a critical sector. However, the hydro-power sector is very vulnerable to erratic rainfall patterns. For example, ‘run-of-river’ type of plants (which are the most common type in Nepal) rely on predictable river flows. When rainfall and therefore rivers are low, plants cannot operate to full capacity.

Even when river flows are sufficient Nepal cannot meet the growing demand for electricity, which causes rolling black-outs (in recent years this is often around 12 hours per day). During low-rainfall years, the situation is even worse. This shortage of electricity stops factories and shops from operating, reduces exports of electricity to India, and forces families to spend their precious income on diesel generators and other inefficient back-up sources of power. The study has calculated that the additional stress of climate change on hydro-electricity production is already costing the equivalent of 0.1% of GDP per year on average, and 0.3% in very dry years.

Together with floods and the impact on agriculture, these three risk areas could cost Nepal the equivalent of 2-3% of current GDP/year by mid-century.

What does it mean to lose 2-3% of GDP? How will it affect the 25% of the population currently living under the poverty line?

The last 50 years of development research and policy tells us that economic growth is the single most effective way of reducing poverty. With reduced economic growth, it will certainly be harder and slower for the Government of Nepal to pull nearly 7 million people out of poverty. The tax base will be less, limiting the welfare and services the Government can provide. Economic growth creates employment, and a 2-3% loss of GDP can be expected to impact the amount of new jobs created in the decades ahead.

Adapting to the impacts of climate change

However, it is possible to adapt to the impacts of climate change, and prevent this loss of economic growth (although there may be limits, see the ongoing so-called ‘loss and damage’ debate).

Residents of Banke district have tried to adapt to the increasing flooding. Those who can afford it have reinforced the foundations of their homes or raised them on plinths. Some have changed their farming patterns to grow crops that better withstand the water. But for many, if the situation continues to worsen, they will lose the ability to cope with the impacts of the floods. Some residents are already considering migrating from the area.

These adaptation actions also come with associated costs. A significant increase in investment in these sectors to reduce the impacts of climate change is needed in the medium-term (beyond what increase in investment is already forecast by the Government). The study developed sector future baseline investment profiles, and projected additional investment required between now and 2030 to mainstream adaptation into planned development activities. This came to the tune of an additional US$500m in the hydro-electricity sector (beyond the anticipated US$5bn), US$1.7bn in the agriculture sector (beyond the anticipated US$17bn), and US$209m for tackling water-induced disasters (beyond the anticipated US$321m).

Where should this money come from?  Certainly the private sector will play a role, particularly for agriculture and electricity production. For example, there is a business case for a commercial farmer to invest in irrigation to ensure higher yields when rainfall becomes more erratic. But, a significant burden will still fall with the Government of Nepal.

And so then comes the crux of one of the key debates happening internationally – who should pay? Nepal and other poor nations firmly believe that those industrialized countries who put harmful greenhouse gas emissions into the atmosphere are responsible. The Government now has the economic data to make a strong case for increased levels of international climate finance.

The monsoon flooding season is approaching in Nepal. At the same time, negotiators are meeting in Bonn for the latest in a never ending series of UNFCCC talks to try and ensure the economic and human impacts outlined in this latest report do not happen.  For those in Banke district uncertain of what the near future holds, questions about who is responsible and who should pay seem far away. How to survive and adapt is the more immediate concern.

This article first appeared on the 16th June on the Guardian’s Global Development Professionals Network.

For more information, contact Elizabeth Gogoi, Climate Development Knowledge Network (CDKN), Elizabeth.gogoi@cdkn.org