Issue link: https://maltatoday.uberflip.com/i/1504427
15 WORLD maltatoday | WEDNESDAY • 26 JULY 2023 WHILE economic and fiscal costs remain manageable, the expected increase in the num- ber, intensity and duration of extreme climate events in the coming years will have longer- term credit-negative effects on Europe, said a Moody's analy- sis. A severe heatwave continues to affect large parts of Southern Europe. Temperatures in Italy exceeded 40°C for a week, and in Croatia, Greece and Spain, thousands of hectares have been consumed by wildfires. Because agriculture plays a small role in most of these economies, the current heat- wave is likely to have relatively limited economic implications, although it could affect food prices and tourism – thousands of visitors are being evacuated from Greek islands. Greece has the largest agri- culture sector, accounting for 4.5% of gross value added and 10.9% of employment in 2022. "However, the countries are major suppliers of olives, grapes, grains and fruits, and production shortfalls will pres- sure food prices: in 2022, high temperatures reduced EU cere- al harvest by 10.2% relative to the last five years. "Heatwaves may reduce Southern Europe's attractive- ness as a tourist destination in the longer term or at the very least reduce demand in sum- mer, which will have negative economic consequences given the sector's importance," said Moody's. "Under our ESG framework, we assess these four countries as having moderately negative1 exposure to physical climate risk, alongside Portugal, Cy- prus and Malta." It said Southern European countries are among the most exposed to heatwaves. Hot and dry weather condi- tions will also affect northern European countries. "For example, supply chains are affected because water levels in main river transport routes are near historical lows. "Transportation costs on the Rhine have increased, and traf- fic has declined. "In 2022, shallow waters caused freight ships to operate at just 25%-35% of their capac- ity." Electricity generation, par- ticularly hydropower, is also adversely affected by heat and drought at a time when air con- ditioning usage increases ener- gy demand. Among the four countries, Croatia and Italy are the most reliant on hydropower in their energy mix, with hydropower comprising 49% of electricity production in Croatia and 17% in Italy. "Because reservoir levels in both countries are much higher than this time last year follow- ing heavy rainfall in the spring, we expect energy supply will be sufficient. "Supply is also aided by ex- cess supply from renewables in Northern Europe and the re- covery of nuclear output from France." Price volatility Moody's argues that severe weather conditions will in- crease price volatility as coun- tries resort to alternative fuels or imports. Wholesale electricity prices in Southern Europe are cur- rently higher than in the rest of Europe. "Governments are likely to extend support to affected re- gions if extreme weather con- ditions persist. "Moreover, heat increases the risk of wild- fires, which will add to govern- ment costs." The EU estimates that wild- fire damage in 2022 cost at least €2 bln. To strengthen its prepared- ness, the EU doubled the size of the stand-by firefighting fleet it finances this year. "Adaptation measures to strengthen resilience to ex- treme weather-related events will require significant but manageable public expendi- ture. According to the European Commission, to limit the rise in global temperatures by 1.5°C above preindustrial levels, ad- aptation investments will be around €40 bln per year (0.3% of EU GDP). Reflecting this, the govern- ment of Spain approved in May a package of measures worth €2.2 bln to combat the threat of water shortages from droughts. The bulk of the funds will go towards building new infra- structure, such as seawater de- salination plants and systems for wastewater reuse, and the remainder on support for agri- culture. Without such measures to dampen the negative fiscal im- plications of climate-related events, the EC believes that the cost of extreme weather events will have consequential fiscal effects. If global average temperatures rise by around 1.5°C above pre- industrial levels, the EC esti- mates that debt ratios would be 4.5 percentage points higher in Spain by 2032, 2.6 percentage points higher in Greece and 2.2 percentage points higher in Italy mainly as a result of the economic and fiscal costs of extreme climate events. In a scenario where global average temperatures rise by 2°C, it estimates that debt ra- tios would increase by an addi- tional 0.4 percentage points on average. "The fiscal impact appears relatively small, particularly compared to other challenges European sovereigns face, such as ageing. "However, more frequent and intense climate events will add to a number of existing com- peting spending priorities such as the financing of the green transition and increasing age- ing costs, adding to pressures on the public finances." Southern Europe's heatwave has hidden costs Wildfires scorch Greek countryside amid record temperatures in Europe