Economic Cost of Drought and Potential Benefits of Investing in Nature-Based Solutions: A Case Study in São Paulo, Brazil

Abstract

Despite its rich water resources, Brazil is increasingly facing extreme hydrologic events such as droughts and floods. The Sao Paulo Cantareira water supply system (CWSS) offers an opportunity to examine the potential economic benefits of nature-based solutions (NbS) to improve water security and reduce the economic cost of drought. This study explores the potential benefits under a counterfactual NbS land-use scenario compared to actual land use and assesses the economic viability of NbS investments in the CWSS. Specifically, we estimate the economic cost of the 2014–2015 drought in Sao Paulo state for the industrial and water sectors served by the CWSS. We estimate the potential avoided costs under the NbS scenario and conduct a cost–benefit analysis of the NbS scenario investments, including both water supply and carbon sequestration benefits. We estimate that the economic losses of this single drought event totaled BRL 1.6 billion. If NbS had been implemented, this cost could have been reduced by 28%. A cost–benefit analysis that includes only the water supply or both the water supply and carbon sequestration benefits indicates that the NbS scenario has a positive net present value of BRL 144 million and BRL 632 million, respectively. Thus, our results highlight the economic viability of the hypothetical NbS investment in mitigating extreme climatic events.