ADBTHE GOVERNANCE BRIEF1SSUE55·2024Fiscal Risks of Climate ChangeSources and Practical Solutionsby Brent EdelmanExecutive SummaryThis governance briefexplores ways thatclimate change poses risks to public finances and aThe fiscal risks of climate change facingnumber of practical solutions to mitigate these risks.countries in Asia and the Pacific are immense.Main takeaways include the following:Climate-related weather disasters and public(Policymakers in Asia and the Pacific havespending on the climate change mitigation andaccess to a broad suite of analytical tools thatadaptation investments needed to avoid worst-they can use to better assess the fiscal riskscase climate scenarios and protect livelihoods areposed by climate change and to develop waysplacing a significant strain on public finances.Butto mitigate these risks.governments in Asiaand the Pacific are already(Many countries in the region already havetaking wide-ranging measures to proactively addressexperience utilizing these tools and arethese risks.Countries are analyzing the impactgenerating important lessons learned thatof climate change risks on their macroeconomicothers can consider using these tools.frameworks,their finance sectors,and the(These tools can be tailored to each country'ssustainability of their public finances,as well astheown needs and challenges in managing thesuitability of disaster risk financing instrumentsfiscal risks of climate change.depending on their economic conditions.Governments are using these analyses to build inThe table on page 12 presents commonfiscal buffers,better align fiscal frameworks withquestions around the fiscal risks that climate changeclimate targets,and strengthen public financialmay pose for countries in Asia and the Pacific andmanagement practices more broadly.the tools that can help policymakers obtain answersto these questions and take action.This study was led and reviewed by Sandeep Bhattacharya,Senior Public Management Specialist(Tax),ADB.The brief was written by BrentEdelman,Climate Fiscal Policy Expert and ADB consultant.We wish to thank Tariq Niazi,Senior Sector Director,Public Sector Managementand Governance Group;and Hiranya Mukhopadhyay,Director,Public Sector Management and Governance Group,for providing strategicguidance in the development of this brief.We wish to thank Anjum Israr,Senior Public Management Specialist (Domestic ResourceMobilization),Public Sector Management and Governance Group;Nanki Kaur,Senior Climate Change Specialist(Climate Change Adaptation),Climate Change and Sustainable Development Department;and Declan Magee,Principal Economist,Climate Change and SustainableDevelopment Department,for peer reviewing the document and providing invaluable comments.2The Governance Briefntroductionsecurity stresses,increase infrastructure resilienceand improve climate-smart agricultural practices.The Asia and Pacific region is on the frontline ofAt the same time,countries potentially face morethe battle against climate change.It faces rapidexpensive debt loads as rating agencies incorporatetemperature and sea-level rise and suffers theclimate risks into sovereign ratings (Volz et al.2021).most weather-related disasters globally.In Asia,The urgent need for governments to investtemperatures have risen twice faster than the globalin climate change adaptation and mitigationaverage (NOAA 2020).Rising sea levels posemeasures comes at a time when public debts aresignificant risks to food security and livelihoods,already strained as a result of three recent majorespecially in low-lying areas like the Mekongglobal crises:the 2008-2009 global financial crisis,Delta and small Pacific island states.Warmercoronavirus disease (COVID-19),and the Russiantemperatures and oceans have increased theinvasion of Ukraine in February 2022.Betweenfrequency,severity,and unpredictability of weather-2008 and 2021,average government debt ratios inrelated disasters.At the same time,the regionAsia and the Pacific grew from 33%to 51%of grossaccounts for close to half of global greenhouse gasdomestic product (GDP);they are projected to(GHG)emissions and has contributed more thanremain elevated for the next several years(Ferrarini,70%of the global growth in carbon dioxide (CO)Dagli,and Mariano 2023).And the urgent needemissions since 1970 (Dabla-Norris et al 2021);for private finance to invest where governmentsat current levels,Asia would "by itself exhaust thecannot means that the latter need to ensure thatremaining global carbon budget consistent withthe macro-fiscal conditions for climate changelimiting warming to1.5 degrees Celsius (C)byadaptation and mitigation investments are in place.This short brief explores some of the waysAcute and chronic physical hazards causedin which climate change poses risks to publicby climate change present significant fiscal risksfinances and a number of practical solutions toto countries in Asia and the Pacific.Physicalmitigate these risks.It also describes how fiscalrisks in the form of damage generated by climaterisk mitigation can help attract private financingchange-induced weather events such as floodsfor climate change mitigation and adaptationand storms,which led to $50 billion annually ininvestments.damages between 2010 and 2019 in Asia and thePacific (Dabla-Norriset al.2021),create a demandfor public resources for humanitarian relief efforts,Fiscal Risks of Climate Changecleanup,and the reconstruction of damagedinfrastructure.Such events also disrupt publicThe impacts of climate change on governmentrevenue inflows by halting economic activity infinances range from direct and immediatetourism,agriculture,trade,and other sectors.Riskse.g,disaster relief)to indirectand longtermof damages from climate shocks further reduce(e.g.,sovereign creditworthiness)and includepublic revenues by depressing property and asseteverything in between.This brief presents thesevaluations.risks in a way that lends itself to finding practicalThe transition risks of mitigation efforts in Asiasolutions to manage them.For inquiries,commentsand the Pacific will also affect government financesand suggestions,pleaseas countries attempt to reduce reliance on carbon-Fiscal Impacts of Climate-Related Weathercontact SandeepBhattacharya,Seniorbased energy sources and increase investment inDisasters:Macroeconomic Shocks andPublic Managementclean and renewable energy.Over time,significantIncreased Government LiabilitiesSpecialist (Tax),Publicadditional public outlays will be required forSector Managementmitigation actions to limit climate change byfrequency of weather-related disasters in Asia andand Governancereducing GHG emissions or removing GHGs fromthe Pacific,arguably as its most immediate andSector Office,atthe atmosphere.These investments focus ondramatic impacts.Compared with the more typicalsabhattacharya@adb.making the transition from carbon-based to cleaneconomic shocks that can affect countries,theorgor+63286324622.and renewable energy sources and increasingimpact of disasters can be very large.The Asia andPrevious issues of Theenergy efficiency.Governments will also be requiredPacific region is particularly vulnerable to weather-Govemance Briefcan beto increase spending on climate change adaptationrelated natural hazards.Two of the top three andaccessed at http://wwwinvestments to cope with and adjust to the impactsseven ofthe top 20 most disaster-prone countriesadb.org/publications/of climate change.Examples of these investmentsin the world are in the Pacific alone (Cantelmo,series/governance-briefsinclude interventions to respond to health and foodMelina,and Papageorgiou 2019).