Climate Change Adaptation, the Role of the State, and Fiscality

This chapter summarizes some of the main fiscal challenges to sustainability arising out of the use of fossil fuels as a predominant source of energy and related environmental damage from climate change. The chapter argues that countries need to be actively engaged in considering the fiscal and macro-economic implications of the climate change hazards they will confront. The phenomenon of climate change poses significant challenges for analysts seeking to assess a government’s long-run financial condition. Looking forward, climate change hazards are likely to increasingly threaten multiple aspects of a country’s environment. Governments will necessarily be challenged to support private sector agents in adapting to these hazards. While for most countries, the effects of climate change are an exogenous policy threat, considerable uncertainty exists as to the nature and magnitude of the adaptation burdens that will be faced, in part because the trajectory of climate change that will be experienced will to some extent depend on whether global mitigation efforts succeed. The chapter emphasizes that most developing and many emerging market countries will face serious limits in their fiscal capacity to confront these adaptation challenges. The chapter highlights differences in the two main approaches for addressing climate change: mitigation, which focuses on reducing greenhouse emissions; and adaptation, which focuses on reducing the vulnerability of economic agents to the negative effects of climate change. Existing development strategies now tend to silo the challenge of climate change, only adding to the prospective burdens that will be experienced. The chapter highlights recent initiatives by the International Monetary Fund (IMF) to strengthen its economic policy surveillance in support of member countries’ climate change adaptation policies (complementing its support for aggressive mitigation efforts). The chapter concludes that to wait for a decade on this issue until we are clearer on the success of mitigation efforts is to delay policy development and implementation on adaptation that could reduce serious economic and social losses looking forward.