New Publication: Climate adaptation and fiscal sustainability – when timing matters

Read about Climate adaptation and fiscal sustainability: when timing matters, published in Italian Economic Journal by Nicola Campigotto, Simone D’Alessandro and Tiziano Distefano.

Abstract:

Climate change is expected to cause significant socio-economic damage, posing risks to fiscal sustainability. While mitigation remains the primary strategy, individual countries must implement adaptation policies to anticipate and reduce expected harm. This creates a trade-off between adhering to present public deficit constraints-imposed by the EU financial framework-and investing in measures that could limit future economic losses and debt accumulation. First, we develop a theoretical model highlighting the role of adaptation policies in mitigating climate-related productivity losses. We then extend the EUROGREEN model (D’Alessandro et al. Nat Sustain 3(4):329–335, 2020) to incorporate climate damage under the RCP 6.0 scenario, analyzing macroeconomic indicators from 2010 to 2050 across different policy scenarios. As expected, Italy is projected to experience GDP losses, leading to a significant rise in public deficit and debt without intervention. We introduce two adaptation strategies to explore potential solutions: Fast and Slow. In the Fast scenario, the government invests €10 billion over three years, whereas in the Slow scenario, it allocates €1 billion annually over 30 years. Numerical simulations indicate that timing matters: only swift and substantial adaptation (Fast) effectively limits climate-related economic damage and enhances long-term debt sustainability. In contrast, gradual interventions (Slow) have a small impact, despite the same total investment. These findings suggest that fiscal austerity could create a “lose-lose” scenario, restricting the ability of highly indebted countries to protect their economies from climate change while exacerbating long-term fiscal instability.