Gestión

fiscal
estratégica
del Cambio
climático
Module 2:
Risks and impacts of climate change: the fiscal perspective

Climate change risks and their fiscal impacts

Content

 Introduction

 Risks of physical impacts derived from climate change and their fiscal implications
 Physical risks
 Fiscal impacts of physical risks

 Risks of the transition to decarbonised economies and their fiscal impacts:

 Transition risks
 Fiscal impacts of transition risks

 The role of finance ministries on fiscal risks and climate impacts and the transition
Climate change risks and their
fiscal impacts
Introduction

Climate events are becoming more intense,

frequent and long-lasting, so greater
economic, social and environmental impacts
are expected.

The urgency of reducing these impacts

requires countries to adopt ambitious climate
actions.

Both climate events and actions to address

the climate crisis generate significant risks that
can have major fiscal impacts.
Theme 1: Risks of physical impacts
derived from climate change
and their fiscal implications
 Physical risks

The increase in global average temperature and its

effects on the frequency and intensity of natural disasters
expose the region to confront physical risks more
regularly due to:

 The occurrence of extreme weather events such as

cyclones, hurricanes, droughts and floods.

 Long-term changes in weather patterns that can

cause, for example, sea-level rise and extreme heat
waves.

A warmer planet means lower agricultural yields; can lead

to damage to infrastructure; and increase the risk of illness
and death. In recent years, losses from disasters have
already devastated tourism, agriculture and many other
productive activities (IDB, 2021).
 Examples of physical risks
Economic
Characteristics Countries affected Human losses damages (USD
millions¹)
Hurricane Dorian Category 5² storm Catastrophic damage 356 direct deaths 3.892
on Great Abaco and
(2019) Winds of 298 km / hour
Grand Bahama Islands
The strongest ever (in The Bahamas)
recorded that has
directly impacted a
territory

Hurricane Eta Category 4² storm. Colombia, Guatemala, 382 direct deaths 678
(2020) Winds of 240 km / hour Nicaragua and
Panama, among other
LAC countries

Hurricane Fiona Category 4² storm. Puerto Rico, Dominican 28 direct deaths 2.500
(2022) Republic and the region
Winds of 215 km / hour
of Guadeloupe

(1) USD adjusted to February 2023. Source: Own elaboration based on information available from EM-DAT,
(2) Highest rating on the Saffir-Simpson scale used to measure hurricane intensity. CRED / UCLouvain, Brussels, Belgium– https://public.emdat.be/
Fiscal impacts of physical risks

The increasing frequency, intensity and duration of climate events

resulting from the variation in the global weather pattern generate
losses of human lives and reduce economic activity (damage to
infrastructure, sectoral losses etc.).

These losses and damages put severe pressure on public finances.

The deeper the climate crisis, the greater the fiscal costs of
responding to emergencies and adapting are expected to
become (IDB, 2021)

There is no time to waste: recent estimates suggest that the

economic damage from climate impacts could be six times
greater by 2100 than previously estimated (UCL, 2021).
Consult the University College of London
report: Economic cost of climate change
could be six times higher than previously
thought (UCL, 2021).
Physical risks of climate change and fiscal impacts

Climate change poses new challenges for fiscal

policy and management impacting both revenue
and public spending (IDB, 2021).

Consult the blog: What are the fiscal risks from extreme weather events
and how can we deal with them?
 The main channels of fiscal impact of extreme climate
events

 Macro fiscal (fiscal and public debt

sustainability)

 Revenue

 Public spending

 Public investment

 Public financial management

Consult the blog: What are the fiscal risks from extreme weather events and how can we deal with them?
 If the trend of climate events continues, public finances will
weaken

Possible impacts on public finances (IDB, 2021):

 Increased expenses to meet the emergency

 Reduction in tax revenues due to the

slowdown in economic activity

 Increases in public debt

 Abandonment or postponement of new

investment projects
 Some figures on the fiscal impacts of physical risks
Widening of the global fiscal deficit:
 Lower-middle-income countries: 0.8% of GDP
 Low-income countries: 0.9% of GDP
In low-income countries, there is a decline in
public spending, which could be the result of
restricted access to public sector credit and low
execution capacity.
The average annual impact in Latin America and
the Caribbean ranges from 0.2% to 0.3% of GDP.
The main negative impact in Latin America and
the Caribbean is the fall in tax revenues,
equivalent to:
 0.8% of GDP in lower-middle-income countries
 1.1% of GDP in low-income countries
Three key messages on the risks of physical impacts from
climate change and their fiscal implications

1 The increase in global temperature and its effects on the frequency and intensity of
natural disasters expose the region to face, with greater regularity, physical risks due to
extreme climate events and long-term changes in weather patterns.

2 The increasing frequency, intensity and duration of climate events resulting from the
variation in the global weahter pattern, added to the low response capacity, generate
lost human lives and economic losses (damage to infrastructure, sectoral losses, etc.),
which exert a strong pressure on public finances.

3 The deeper the climate crisis, the greater the fiscal costs of responding to emergencies
and adapting are expected to become.
Theme 2: Risks of the transition to
decarbonized economies and
their fiscal impacts
Risks of the transition to decarbonized economies

Financial risks that may arise due to the transition to

decarbonized and climate-resilient economies.

They may involve changes in political, legal, technological

and market aspects as a result of mitigation and adaptation
requirements related to climate change.

Examples:

 Regulations in Europe that establish a carbon footprint tax

that affects Latin America and the Caribbean export
products

 Changes in consumer preferences

 Transition risks

Efforts to implement the Paris Agreement have encouraged:

 The emergence and falling costs of low-carbon technologies.

 The energy transition towards renewable sources.

 Changes in the pattern of consumption towards goods with a

low carbon footprint.

Despite its benefits, the transition towards a low-carbon

economy results in increasing risks of stranded assets, as a
significant part of fossil fuel reserves would need to remain
unexplored and some assets would need to be retired before the
end of their useful life (IDB, 2021).
 Types of stranded assets

Fossil fuel reserves that may
not be extracted or used
Consequence of the
adherence to a determined
carbon budget (or
unburnable carbon) and the
drastic decrease in the
demand for oil as climate
action advances (electric
transport, renewable energy,
etc.).
Installed capital that would
not be used for the extraction
and use of fossil fuels
Physical assets and
equipment installed for the
extraction and use of fossil
fuels that would be kept
underground and not used.
Committed carbon emissions
Replacement of part of the
installed capital with new low-
emission facilities, and the
early retirement of physical
assets and equipment before
the end of their planned lives,
which represents significant
costs for their owners and the
eventual impact on workers
associated with these assets.
Assets that can no longer be
used due to the implementation
of green fiscal policies
Reduction in future rents and
present business value due to
the unanticipated imposition of
carbon prices or the elimination
of hydrocarbon subsidies;
power plants that become
uncompetitive due to carbon
pricing or technological
change; assets stranded by the
ban on the use of some
technologies.

To learn more, see the IDB Monograph (2021): Fiscal Policy and Climate Change: Recent
Experiences of Finance Ministries in Latin America and the Caribbean
Transition risks and their fiscal impacts

Climate change poses new challenges for

fiscal policy and management, impacting both
revenues and public spending.

(IDB, 2021)
 Fiscal impacts of transition risks

There is growing recognition that climate change and

the transition to net zero and climate-resilient
economies can have an impact on public finances
and fiscal outcomes.

 Fiscal impacts as a consequence of the required

decrease in oil production.

 Fiscal impacts as a result of stranded assets.

 Impacts of the application of environmental taxes

and implementation of reforms to energy prices and
subsidies.
Fiscal impacts as a consequence of the required decrease
in oil production

The transition away from fossil fuels presents significant fiscal and economic risk for countries in Latin
America and the Caribbean that depend on fossil fuel revenues (IDB, 2021).

Decrease in production and % of oil reserves in

LAC, which would not be used to meet the
Paris Agreement objectives
If the Paris Agreement's 1.5°C targets are met,
the region's oil demand would decline to less
than 4 million barrels per day by 2035 (60% less
than pre-pandemic levels).
Fiscal impacts
If strong action is taken on climate change,
there would be a loss of tax revenue of about
US$2.6 trillion for the region's oil-exporting
countries by 2035.

Between 66% and 81% of the region's proven, Under strong climate action, revenues would
probable and potential oil reserves could not be $1.3 billion to $2.6 trillion lower, compared
be used. with $2.7 trillion to $6.8 trillion if global demand
were high enough to fully exploit reserves.
Fiscal impacts of stranded assets
Stranded assets affect extractive companies, power generation, transportation, supply and value
chains, and workers and communities associated with these sectors (Saget et al, 2020, cited in IDB,
2021).

Fiscal impacts
• Drastic fall in public revenues from these sectors (Saget et al, 2020, cited in IDB, 2021).
• Drastic fall in revenues from gasoline taxes and additional fiscal pressures of contingent
liabilities in related sectors (Coffin et al, 2021, cited in IDB, 2021).
• Additional tax pressures on contingent liabilities in related sectors.
• Instability in financial markets due to the devaluation of large amounts of assets, which in
turn could create macroeconomic instability (Frisari et al., 2019, cited in IDB, 2021).
• Loss of wealth for affected capital asset owners that can lead to political instability.
• Possible lobbying actions that go against the fulfillment of the objectives of the Paris
Agreement (Rozenberg, Vogt-Schilb and Hallegatte, 2020, cited in IDB, 2021).
The impacts of the application of environmental taxes and
implementation of reforms to energy prices and subsidies

 Negative effects on the cost of energy, food and public transport, affecting poor and
vulnerable consumers (Feng, 2018; Vogt_Schilb et al., 2019, cited in IDB, 2021).

 Social unrest if the price increases associated with an environmental tax reform or the
reduction of subsidies are not evaluated and managed well.

 Some adverse impacts may arise, especially for energy intensive sectors.
Three key messages of the transition to decarbonized
economies and their fiscal impacts

1 The falling costs of low-carbon technologies, the energy transition towards renewable
sources and changes in the consumption pattern towards low-carbon goods generate an
increasing risk of stranded assets.

2 Climate change and a disorderly transition towards decarbonized and climate-resilient

economies can systemically impact the financial sector due to the required decrease in oil
production, stranded assets, and the application of environmental taxes and
implementation of reforms to energy prices and subsidies.

3 The transition also generates benefits such as the creation of new industries and jobs.
Climate change and the transition pose new challenges for
fiscal policy and management impacting both revenues
and public spending
Theme 3: The role of finance
ministries on fiscal risks and
climate impacts and the transition
Finance ministries play a central role in managing physical
and transition risks and their fiscal impacts given they can:

Manage economic Advance a just and Boosting access to

and fiscal risks inclusive transition to finance
decarbonized economies
Direct public resources
Improve the
towards sustainable
management of public
infrastructure; align
investment by Manage fiscal risks
investments with long-
incorporating elements caused by reduced
term mitigation and
of resilience and risk demand for fossil fuels
adaptation strategies;
management; and and expand the use
and strengthen
improve the quality of of renewable energy
capacity to manage
public spending and green businesses.
public investment and
related to natural
mobilize financial
disasters.
resources.
References

• Alejos, L. (13 September 2021). What are the fiscal risks from extreme weather events and how can we deal with
them? IDB – Gestión fiscal. https://blogs.iadb.org/gestion-fiscal/es/cuales-son-los-riesgos-fiscales-de-los-eventos-
climaticos-extremos-y-como-enfrentarlos/
• IDB(2021). Fiscal Policy and Climate Change: Recent Experiences of Finance Ministries in Latin America and the
Caribbean / coordinated and edited by Raúl Delgado, Huáscar Eguino and Aloisio Lopes. p. cm. — (Monograph of
the IDB, 941). http://dx.doi.org/10.18235/0003376
• Eguino, H., Delgado, R., and Lopes, A. (26 July 2021). Three areas where finance ministries can help solve the climate
crisis: https://blogs.iadb.org/gestion-fiscal/en/three-areas-where-finance-ministries-can-help-solve-the-climate-crisis/
• Eguino, H., Delgado, R. and Lopes, A. (8 September 2021). It’s time for finance ministries to take climate action to the
next level: https://blogs.iadb.org/sostenibilidad/en/its-time-for-finance-ministries-to-take-climate-action-to-the-next-
level/
• UCL News. (6 September 2021). Economic cost of climate change could be six times higher than previously
thought. https://www.ucl.ac.uk/news/2021/sep/economic-cost-climate-change-could-be-six-times-higher-
previously-thought
Photos and icons
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• Slide 7: Photo from Pixabay: https://pixabay.com/es/photos/cambio-clim%c3%a1tico-calentamiento-global-5224748/
• Slide 9: Photo from pixabay: https://pixabay.com/es/photos/inundado-desastre-inundaciones-491245/
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• Slide 15: Photo from Sam Forson: https://www.pexels.com/es-es/foto/turbina-de-viento-gris-tres-243138/
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• Slide 19: Photo from Johannes Havn: https://www.pexels.com/es-es/foto/foto-de-la-plataforma-petrolera-1716008/
• Slide 20: Photo from Pixabay: https://pixabay.com/es/photos/pxclimateaction-climatico-paisaje-4684217/The icons
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