SustainaWeekly - The impact of low Rhine water levels on the Dutch economy

Economist: The Rhine is Europe’s busiest river. Everyday some 600 ships carrying 200 million tonnes of cargo across the Dutch-German border. Climate change is likely to change the river water dynamics, resulting in more frequent episodes of floods and extremely low water levels. Our analysis shows that international freight is severely disrupted by low water levels, but Dutch industrial production and construction is relatively unaffected.

Strategist: We compared the Implied Temperature Rise score of Sustainalytics across different sectors. The banking sector scores better than energy-intensive sectors, such as utilities, but still lags behind the 1.5 degrees Celsius target required to meet the goals under the Paris Agreement. However, not all utility companies score as bad as the average – for instance, Ørsted A/S scores very well in comparison to its peers.

Sector: Insurance can reduce – though not eliminate – the economic effects of extreme weather events, as it helps to reduce uncertainty by pooling risk. However, the increase in the frequency and intensity of catastrophes will likely reduce the availability of insurance coverage in many locations and/or lead to sharply higher premiums. Indeed, evidence of such a scenario is already building and the situation will likely get worse.

ESG in figures: In a regular section of our weekly, we present a chart book on some of the key indicators for ESG financing and the energy transition.

Ripple effects: exploring the impact of low Rhine water levels on the Dutch economy

co-author: Dirk Jansen

• The Rhine is Europe’s busiest river. Everyday some 600 ships carrying 200 million tonnes of cargo across the Dutch-German border. The river is the most important transport route for German industry, connecting the Port of Rotterdam to the Rhine-Ruhr region, Germany’s industrial heartland.

• Climate change is likely to change the river water dynamics, resulting in more frequent episodes of floods and extremely low water levels

• Transport along the river was severely disrupted in 2018 and 2022 when water levels fell below the critical threshold. German industrial production fell as a result

• In this note, we discuss the impact of low water levels on inland freight transport volumes on Dutch economic output. Our analysis shows that international freight is severely disrupted by low water levels, but Dutch industrial production and construction is relatively unaffected

Introduction

The Rhine, the busiest river in Europe, is of great economic importance. Due to drought, both in 2018 and 2022, there have been episodes where the water level in the Rhine has dropped to critical levels, severely limiting inland shipping. According to the Kiel Institute for the World Economy, in November 2018, low water levels led to a drop in German industrial production of 1.5 percent, causing a decline of German GDP by 0.4 percent.1)This note is a summary of a longer note where we examine the impact of low water levels on freight volumes transported along the Rhine in the Netherlands and on Dutch industrial and construction output.

Climate change and the Rhine

The Rhine has a pluvio-nival regime, meaning that it is a snowmelt and rainfed river. As the weather gets warmer in spring, snow in the Alps starts to melt, gradually releasing water into the Rhine. Water is temporarily stored in the Alpine border lakes, which has a smoothening effect on the Rhine discharge. Downstream of Basel, the pluvial regime of the Rhine gradually increases in domination.

However, due to climate change, the Rhine regime will change. As the climate becomes warmer, the amount of precipitation increases. There will also be more precipitation in winter, but because of higher temperatures, there will be less snow. Since the snow cover will decrease, the snow will melt faster in spring. Moreover, a warmer climate leads to an increase of the frequency of extreme, high-intensity rainfall events. Thus, the Rhine will turn into a rainfed river, and water levels in the river will become more volatile. This leads to an increased risk of extremely high water levels and floods, mostly in spring. In the summer, there will be less precipitation. On top of that, due to higher temperatures, more water will evaporate. This combination leads to an increased risk of extremely low water levels. This is why it is important to understand the economic effects of water levels.

Empirical specification and results

Our empirical analysis is split into two stages. In stage one, we explore the impact that the low water level, as measured at Kaub, has on freight that is transported along the Rhine in the Netherlands. In the second stage, we estimate the impact of low water levels on industrial production and construction in the Netherlands.

The full set of results is available in the longer note. Briefly, our analysis shows that low river levels at Kaub have a significant impact on freight transport in the Netherlands. An additional day of low water level reduces the total weight that is transported along the river by 0.4%. This implies that a string of thirty consecutive days below the threshold will reduce freight transport by around 12%. Our analysis also shows that the effects linger on - the coefficient on the first lag of the water level is similar in magnitude, implying that thirty consecutive days below the threshold leads to a cumulative 24% reduction of freight transport over two months. Both coefficients are significant at the 1% level and the results are robust across the different categories of cargo (wet, bulk and container).

To place this in context, the most severe recent period of drought occurred in the second half of 2018 when the water level fell below the threshold for around 80 days. More recently, in 2022, the water level dropped for 37 consecutive days.

Next, our analysis shows that inbound, outbound and throughput freight is severely impacted by low water levels and this is most pronounced for container freight, but also relevant for dry and bulk cargo. A noteworthy exception is domestic freight which is largely unaffected by the low water levels in Kaub.

The significance of the water level at Kaub for river freight in Netherlands is largely driven by international freight (inbound, outbound and throughput) and as such it reflects the importance of global trade for inland river transport in the Netherlands with Rotterdam as a major European port and Germany a major manufacturing exporter and importer. Our results also show that the low water levels at Kaub do not result in a significant amount of disruption in freight that exclusively travels on inland waterways within the Netherlands.

Again, the full set of results is available in the longer version of this note. In short, episodes of low water levels at Kaub do not have a significant impact on economic output. In other words, the industrial output in Netherlands is largely unaffected by developments on the Rhine at Kaub. This is the case for the major industrial groups as well as the four manufacturing sub-sectors. The second stage results are also consistent with our finding that the volume of domestic freight transport within Netherlands is immune to developments on the Rhine in Kaub.

Conclusion

We assess the impact of low water levels on the Rhine on Dutch inland water freight transport volumes and Dutch industrial production. We show that disruptions to the river level caused by drought have a significant impact on the volume of freight that is transported along the river in Netherlands. The impact is most pronounced on international freight rather than on domestic freight. More specifically, we find that thirty consecutive days below the threshold leads to a cumulative 24% reduction of freight transport over two months.

The drought episodes that have caused damage to the German economy in 2018 and 2022 and to Dutch inland water freight volumes did not have a significant direct impact on Dutch industry and construction sector output. One important reason for the dichotomous results is that many Dutch industrial firms are located at the shore or at sea ports, which leaves them largely unaffected by lower water levels in the Rhine. Another explanation is that most of the German economic activity that is hurt by low water levels is located upstream of the major bottleneck Kaub. As the Netherlands is a lower country and is located downstream of Kaub, water levels are significantly higher in the Dutch part of the Rhine. Our analysis finds that inland shipping within the Netherlands was not affected by the drought episodes in 2018 and 2022.

While Dutch economic output is less affected by low water levels in the Rhine than the German economy, caution is advised. The Rhine is currently a snowmelt and rainfed river. As the climate becomes warmer, the water levels will depend more on rain, and the frequency of extreme rainfall events will increase. Thus, the Rhine will turn into a rainfed river, and water levels in the river will become more volatile, which leads to an increased risk of floods in spring and an increased risk of extremely low water levels during the summer. Our study focussed on the short run volume effects of low river levels, but there is also the adverse price effects from the 'low water surcharge’ and the longer term effects of adaptation, which might trigger a switch to more expensive road transportation, additional infrastructure spending, such as on warehousing facilities and higher levels of inventory. The longer term price and volume effects requires further investigation.

Finally, more frequent drought episodes and floods, which hamper industrial output and lead to higher transportation costs for businesses, could hurt business investment in German industry, a capital-intensive sector. Since this problem is expected to become more serious in the future due to climate change, and Germany is The Netherlands’ most important trade partner, the Netherlands should also be worried about Rhine water levels.

1) Ademmer, M., Jannsen, N., & Meuchelböck, S. (2023). Extreme Weather Events and Economic Activity: The Case of Low Water Levels on the Rhine River. German Economic Review, 24(2), 121-144.