Revealing indirect risks in complex socioeconomic systems: A highly detailed multi‐model analysis of flood events in Austria

Abstract

Cascading risks that can spread through complex systems have recently gained attention. As it is crucial for decision‐makers to put figures on such risks and their interactions, models that explicitly capture such interactions in a realistic manner are needed. Climate related hazards often cascade through different systems, from physical to economic and social systems, causing direct but also indirect risks and losses. Despite their growing importance in the light of ongoing climate change and increasing global connections, such indirect risks are not well understood. Applying two fundamentally different economic models—a computable general equilibrium model and an agent‐based model—we reveal indirect risks of flood events. The models are fed with sector‐specific capital stock damages, which constitutes a major methodological improvement. We apply these models for Austria, a highly flood exposed country with strong economic linkages. A key finding is that flood damages pose very different indirect risks to different sectors and household groups (distributional effects) in the short and long‐term. Our results imply that risk management should focus on specific societal subgroups and sectors. We provide a simple metric for indirect risk, showing how direct and indirect losses are related. This can provide new ways forward in risk management, for example, focusing on interconnectedness of sectors and agents within different risk‐layers of indirect risk. Although we offer highly relevant leverage points for indirect risk management in Austria, the methodology of analyzing indirect risks can be transferred to other regions.

Uncovering the Dynamics of Multi‐Sector Impacts of Hydrological Extremes: A Methods Overview

“…(2021) assessed the impacts of droughts on the Italian economy, and Bachner et al. (2023) applied a CGE model to highlight the cross‐sectoral impacts of flood events within Austria.…”

A gap approach for preventing stress in complex systems: managing natural hazard induced fiscal risks under a changing climate

“…Within such a framework, the interaction of agents determines meso-and macro-outcomes, which can further feedback into the micro-decision-making of individual agents resulting in non-linear, path-dependent outcomes. Consequently, ABMs are better equipped to handle large parameter spaces, nonlinear thresholds, boundary conditions and out-of-equilibrium states (Bachner et al, 2024). Thus, they outperform state-of-the-art modeling tools typically used in disaster analysis especially when non-linear dynamics are the focal point.…”

“…One way forward with our suggested gap approach would be then to not assume international finance flows covering the gap but instead use the gaps as an input to the ABM model (Poledna et al, 2018). In that way, the indirect consequences due to such events that spread through the socioeconomic system can be better understood and be related to other sustainability dimensions (Bachner et al, 2024). As indicated, such models need to be calibrated in quite some detail (see Reichstein et al, 2021) and will take time to be build.…”

Shared Exposures or Management Fashions? Drivers of Cross-Industry Convergence of Textual Risk Disclosures

“…While it is well understood that risks within a system can be interlinked, their specifically systemic nature arising from such linkages has recently attracted increasing attention. Systemic risks are characterised by complexity, uncertainty, ambiguity, and wide ripple-effects (Aven and Renn, 2020;Renn et al, 2022), with examples ranging from the 2007-08 Financial Crisis (Earle, 2009;Ivashina and Scharfstein, 2010) and the (still unfolding) COVID-19 pandemic (Botzen et al, 2022), to the current and accelerating climate crisis, which interconnects risks in complex ways on a global (and trans-generational) scale (indicatively: Aglietta and Espagne Chaudhry et al, 2023;Bachner et al, 2023).…”