Impact of climate change on public finance

Published 10 November 2022 — Updated 27 March 2023


Advancing the green transition locally and globally is a more important quest for the Finnish economy and public finance than defining the direct and short-term impacts of climate change. Still, active and deliberate policies are needed to mitigate negative industry-specific and regional impacts, as well as to potentially unlock positive economic outcomes.


Demos Helsinki, ETLA, and SYKE collaborated 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 directly and indirectly impact 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 spillover effects on public finance and financing from the global level down to the regions and sectors of national economies. However, little systematic information is available on climate change’s public finance implications.


To shed light on these unobservable (but very real) effects, this research aimed to create an overall picture of the effects of climate change and mitigation on the sustainability and risks of public finances. Examining relevant literature and macroeconomic general equilibrium models, the project studied global effects as well as direct and spillover effects on Finland. Challenges related to modelling and the best methods of modelling were also evaluated.


The literature shows that there are still rather few studies on the effects of climate change,
preparedness, and adaptation to the public economy, and the information that exists on the subject is uncertain. To understand this, research needs to form a better overall view of the effects of climate change as well as mitigation and adaptation policies on the national economy and public finances. A holistic perspective is needed as the chains of influence between climate change, and public finance are long and uncertain in our global but also local economies. This research chose to approach the modelling of these complex impacts by combining various detail-level knowledge on the national economy level.


Based on our analysis, how we manage the green transition will be more important for the Finnish economy than climate change’s direct and physical impacts in the short and medium term. The green transition is driven by Finnish and EU policy measures and global technology and behavioural changes. How actively and successfully we manage to implement policies promoting the green transition is central to determining the kind of economic effects Finnish public finances will experience during the transition phase in the coming decades, both on a national and more local level.


Demos Helsinki was responsible for conducting an analysis of local-level impacts. In addition to the direct effects of climate change, such as changing weather patterns and temperatures leading to challenges with surface runoff and energy production and use in cities, climate policy also affects municipal public finance indirectly through the economic structure and the assets of the municipalities. Municipalities recognise the diversification and greening of the business structure as ways to improve competitiveness and thereby strengthen the possibility of unlocking positive economic effects from climate policy.


However, the impacts of climate change and related policies can vary in size and be industry-specific and regional. Especially in the short and medium term, advancing the green transition will involve difficult transitions and changes in the economic and industrial Finland’s structure will inevitably affect people directly and disproportionately. Understanding and preparing for these impacts on a local and national level is key in mitigating negative and unlocking positive impacts.


The work was completed in March 2023. The project is part of the Government’s analysis, assessment, and research activities, and the final report can be found here.


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



Feature Image: iStock/Bet_Noire