18 August 2009

Climate change and fiscal policy

Here is a paper by Lis and Nickel under the ECB Working Paper series that studies the impact of climate change on public finances. Taking the occurence of large scale extreme weather events as a given in the future is a good assumption that should be built into the systems by policy makers.
This paper explores implications of climate change for fiscal policy by assessing the impact of large scale extreme weather events on changes in public budgets. We apply alternative measures for large scale extreme weather events and conclude that the budgetary impact of such events ranges between 0.23% and 1.1% of GDP depending on the country group. Developing countries face a much larger effect on changes in budget balances following an extreme weather event than do advanced economies.
Based on these findings, we discuss implications for fiscal policy and publicly provided disaster insurance. Our policy conclusions point to the enhanced need to reach and maintain sound fiscal positions given that climate change is expected to cause an increase in the frequency and severity of natural disasters.
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