Compound dry-and-hot extremes exacerbate income inequality and poverty in Europe

• We contribute to the scarce literature on compound events and household welfare. • Compound heat waves had 0.8 % points greater impact on income than heat waves alone. • The poor lost 2.7 % points more income than the rich due to heat and drought. • The unequal distribution of income impacts increased poverty in Europe by 1.1 %. • A 1.5 °C scenario lowers income impacts by 20 % points than current policy scenario. Heat waves and droughts are each highly damaging to people’s incomes, but little is known of the joint impact on household welfare when these events occur simultaneously. We combine European household level survey data from 2004 to 2022 with high resolution temperature and drought data in a fixed effects econometric regression to investigate the change in household income and risk of poverty due to heat waves, droughts, and compound dry-and-hot extremes. We find that the average reduction in annual household income was 0.8 percentage points larger when heat waves coincided with a drought month, compared to when heat waves occurred alone. The compound climate impact was stronger for poorer households, with household in the poorest income quintile experiencing a reduction in average household income from the combined impacts of heatwave and drought of 2.7 percentage points larger than the households in the richest income quintile. We estimate that heat waves and droughts increased the at-risk-of-poverty (AROP) rate in Europe by 1.1 percentage points or an additional 5.6 million persons for 2004–2022 on average. Our projections indicate that limiting global warming to 1.5 °C by 2100 minimizes the negative impacts on income and limits the increase in income inequality and at-risk-of-poverty rates. Limiting warming also allows for more time to adapt to the adverse effects of heat waves and droughts. To reduce poverty by at least 15 million by 2030, the European Union has to scale up its protection of vulnerable populations through climate mitigation and adaptation.