Water scarcity and drought are social and economic problems in large parts of the world that will intensify due to climate change. The existing literature on the costs of drought is scarce, fragmented and heterogeneous and there is a need for comprehensive cost estimations to help design an effective policy response. This is particularly the case in Europe, which is currently developing its drought strategy. The severe drought that affected Barcelona in 2007/2008 is used here as a case study to illustrate the costs of this type of extreme event. We assess direct losses of the affected economic sectors, indirect costs to the rest of the economy and non-market welfare losses caused by environmental damage and household water restrictions. Additionally, we also look at the cost of the measures implemented to address the drought and discuss the implications in terms of their cost-effectiveness. Our results indicate a total cost of this drought event of 1,605 million Euros (0.48% of the regional GDP) and highlight the need for more accurate cost estimations at the European level. The study also points to the need to promote water saving measures and to increase the structural adaptive capacity of systems subjected to water scarcity.

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