Counterbalancing the Effects of Climate Change Adaptation on Public Budgets: Factor Taxes, Transfers, or Foreign Lending?

Climate change impacts and public adaptation have manifold effects on public budgets both on the expenditure and revenue side, which calls for instruments to mitigate these effects such that the provision of fundamental public services such as health or education can remain at the same level as without climate change. This paper therefore compares different instruments to counterbalance expenditure cuts induced by climate change impacts and adaptation within a CGE framework. When comparing the climate change scenario to the baseline scenario, we find that revenues – and thus expenditures – decline. When adding different instruments to counterbalance this effect, we find that there are large differences in budgetary and macroeconomic consequences across instruments. While an increase in capital or output taxes reduces the welfare losses of climate change, higher labor taxes amplify welfare losses. Also increased foreign lending has positive macroeconomic effects but leads to a higher deficit.