Impact of climate change on public finance

Demos Helsinki, ETLA and SYKE are collaborating to study the impact of climate change on public finances on a national and regional level in Finland and to build a framework that improves public finance assessment.

 

The public sector plays a key role in tackling climate change as a regulator, facilitator, anticipator and risk insurer. But while protecting and guiding the economy in times of transition, the public sector must also ensure the sustainability of its own economy. It is expected that climate change and its mitigation will have a direct and indirect impact on public finances.

 

Direct impacts can be observed in the event of climate risks, such as natural disasters or gradual climate disruptions. In such cases, the role of public finances as economic stabilisers could impose high direct costs, especially if various climate change multiplier mechanisms materialise. Indirect effects can also exist at different levels of the economy, such as prevention costs and the reallocation of productive resources. The need to smooth changes in income distribution also entails costs. In addition, the slowdown in economic growth reduces tax revenues, and structural change alters the relative size of the tax base. Overall, the balance of the economy will change as a result of climate change, with spill-over effects on public finance and financing from the global level down to the regions and sectors of national economies. However, little systematic information is yet available on the public finance implications of climate change.

 

To shed light on these unobservable (but very real) effects, we are creating a framework that comprehensively assesses climate policy implications on public finance. The framework will gather information on the mechanisms of fiscal impact and build risk scenarios for Finland to better understand the different impacts of climate change and related policies on fiscal sustainability and risks on a national and local level.

 

ETLA is leading the work, which will be completed in January 2023. The project is part of the Government’s analysis, assessment and research activities, and the final report will be published on tietokayttoon.fi.

 

This project comes as part of Demos Helsinki’s continuous effort to empower governments in creating a desirable future instead of responding to crises. For example, we have built the concept of Anticipatory Public Budgeting, which provides governments with the tools to account for future crises in their budgeting now.

 

Want to hear from our expert working on this project? Please, contact:

Otso Sillanaukee
Sustainability & Circular Economy Expert
otso.sillanaukee@demoshelsinki.fi

 

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Feature Image: iStock/Bet_Noire