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By  Emily Lehmann 14 July 2023 5 min read

Key points

  • Droughts are expected to become more frequent and severe in future, and the impacts of drought are far-reaching.
  • There are gaps in our estimation of economic costs related to mental health and ecosystem degradation.
  • A new framework could provide a more comprehensive picture of drought’s economic costs.

As the driest inhabited continent on Earth, Australia is no stranger to drought.

Drought impacts are felt acutely when water becomes scarce and agricultural yields drop. Future droughts are inevitable in Australia. But predicting when they will come, and what their impact will be, is challenging.

It’s worth noting Australia’s ‘El Nino alert’ status doesn’t necessarily mean lower rainfall or that we are headed for another drought in the near-term. What we do know is droughts are expected to become more frequent and severe in future. What we do now to prepare will help improve outcomes.

A significant national effort through our Drought Resilience Mission is focusing on better understanding and reducing future drought impacts.

Understanding drought costs

Dr David Fleming-Munoz is a Senior Economist in our Environment team. He recently investigated the bill droughts present to Australia in a comprehensive literature review. The findings aim to identify and ensure strategies address the significant costs.

"To make a measurable difference to drought, we must first understand all the potential impacts," David said.

"The challenge is no two droughts are the same. They vary in length, duration and severity. It’s often not clear when they start or end."

The study makes note of the wide range of impacts and costs we need to factor in. Australia’s experience through its most recent drought in the 2010s highlights the extent of drought impacts to industry, communities and the nation.

Our Drought Resilience Mission is focused on better understanding and reducing future drought impacts. ©  All rights reserved

Disruptions to crops and agricultural production

Regional communities in New South Wales (NSW) and southern Queensland (Qld) are among Australia’s most recent drought-affected areas. They rely heavily on agriculture. Immediate impacts in these states included water supply restrictions and disruptions to crops and livestock production.

Dr Graham Bonnett leads our Drought Resilience Mission. He said bad seasons hit producers’ bottom lines.

The loss of agricultural production led to lost income and also impacted on revenue for other local businesses. These impacts played out over time, reducing overall productivity for Australia’s agriculture sector. This also impacted the wider economy.

Another knock-on effect was higher food prices and scarcity affecting markets domestically and abroad. There were also direct economic impacts on town water supply.

When taps run dry

When a severe drought and water shortage extends over several years, communities risk completely running out of water. ‘Day Zero’ is when residential taps are turned off, which is a not-too-distant reality for some Australian towns.

In 2020, Stanthorpe in Qld reached Day Zero, while nearly 50 other towns came close.

“Critically low or no water means trucking it in daily at costly and unsustainable rates to meet residential demand,” David said.

“Drought is a time when communities can least afford water cartage costs which can be upwards of millions of dollars.”

Stanthorpe carted in about 40 truckloads of water daily over 18 months. It cost them $800,000 a month, equating to more than $14 million in total.

Rainfall has since replenished water supplies, but our Drought Resilience Mission is looking at ways to improve water security to avoid Day Zeros.

"Understanding the costs of short-to-no water supply on welfare and social disruptions can help target long-term strategies to improve water security in our regions," David said.

Physical and mental health impacts

There are also connections between how drought affects the environment and public health. One example is how drought exacerbates vegetation loss and soil erosion. This can lead to hazardous dust storms and poor air quality.

These dust storms can travel thousands of kilometres, affecting broader regions and major cities. In 2018, a dust cloud set over Sydney from drought-affected areas in far western NSW.

Plummeting air quality sparked an air quality warning for vulnerable groups. This includes young children, the elderly and people with respiratory conditions. Dust also impacted crop production and food safety. Drought-related dust was linked to a serious listeria contamination at a melon farm that same year.

Reduced mental and physical health and wellbeing for individuals and communities is concerningly common.

The 2023 National Farmers Wellbeing Report highlighted the cumulative impact of disasters, including drought and flooding, on farmers’ mental health in recent years.

"We need to look not only at the impact to families and communities at large but also a higher demand for health services," David said.

"Understanding these impacts will help determine the level of services needed in rural areas to cope with the stress of drought."

Vegetation loss and soil erosion from drought can lead to hazardous dust storms and poor air quality.

Considering health impacts in economic terms

“We need to factor in all these different dimensions and be more comprehensive in our assessments of drought impacts,” David said.

“Most studies focus on impacts to the agricultural sector, so we propose additional new data points to understand the broader impacts.”

Examples of these include:

  • Mental health impacts on services, productivity and the wider economy.
  • Social disruption in communities, including out-migration and decay in social capital.
  • Costs as a result of ecosystem services degradation or loss.
  • Impacts to vulnerable communities, including Indigenous people.
  • Expenses on potable water infrastructure and their maintenance.

A new framework for understanding drought impacts and costs

David proposes a simple economic framework to categorise drought impacts based on a region’s exposure.

He argues a region’s exposure must be considered across each of these different dimensions. Exposure includes the people, infrastructure, production and supply chains, as well as ecosystems that are prone to disruption. A comprehensive understanding of exposure levels is key to determining potential impacts.

“Drought causes cumulative and compounding financial and health impacts across individuals, communities and systems,” David said.

“Impacts on productive sectors like agriculture can spread to individuals and wider systems, and vice versa.”

Senior Economist Dr David Fleming-Munoz proposes a simple economic framework to categorise drought impacts based on a region’s exposure.

Targeting strategies to improve drought resilience

David emphasised drought impacts are also contextual. Different communities with the same water stress may be impacted differently depending on their exposure and resilience.

Our Drought Resilience Mission is working in partnership with communities, industry and government on initiatives to improve water use and management practices.

Graham said water banking initiatives, for example, could see excess water stored underground for future use during a drought.

"These interventions can improve regional resilience and help lower the economic impacts droughts cause," Graham said.

"But to really assess improvements to resilience, we need a baseline and comprehensive monitoring of drought exposure and costs in place."

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