How shifting climate burden affects policy

Public finances are increasingly vulnerable to physical climate and nature risks, with extreme weather events acting as triggers for broader fiscal transmission risks. The real impact unfolds through second- and third-order effects that affect infrastructure, businesses, households, and the financial system. Nature plays a critical role in this dynamic. Healthy ecosystems can absorb shocks and mitigate losses, while degraded ecosystems can exacerbate damages and increase fiscal exposure. When infrastructure fails, governments often step in as insurers of last resort, leading to emergency responses, reconstruction efforts, and public guarantees that convert physical damage into immediate expenditure pressures. Business disruptions result in insurance claims, reduced output, and shrinking tax bases, transforming climate shocks into revenue shocks. Households face similar challenges; when insurance is inadequate or unaffordable, recovery relies more on public transfers and welfare spending, raising contingent liabilities. As physical risks grow, private (re)insurance may retreat or adjust pricing, shifting risk to public balance sheets rather than eliminating it. This creates a direct link between climate and nature risks and sovereign risk, leading to rising deficits, increased debt levels, and greater contingent liabilities that weaken fiscal resilience. These factors influence sovereign credit ratings and borrowing costs, impacting access to international capital markets. Financial institutions are also at risk due to defaults, asset repricing, and correlated losses, which can reinforce systemic risk loops. The key takeaway is that adaptation, resilience, and nature protection are essential for fiscal stability, not merely environmental considerations. Ignoring this connection does not postpone costs; it exacerbates them. Source: Tackling the Insurance Protection Gap, WWF; Krichene & Kirvalidze (2025), Allianz Research.

A 1°C rise in temperature is a poverty multiplier. New global evidence based on subnational data from 130 countries shows that each additional degree of warming: ✖️ Increases poverty by 0.63–1.18 percentage points ✖️ Raises inequality by 1.3–1.9% (Gini index) ✖️ Pushes 62–99 million more people into poverty by 2030 compared to a world without climate change The impacts are not evenly distributed. They are strongest in poorer countries, especially where agriculture dominates livelihoods, and are particularly acute across Sub-Saharan Africa. When we look only at national averages, much of the damage disappears. But subnational analysis reveals the real story: large, localized climate shocks interacting with poverty, inequality, and vulnerability. This matters for policy, finance, and development planning. If we underestimate climate risk by relying on national-level data, we: 1️⃣ Misprice climate risk 2️⃣ Misallocate adaptation finance 3️⃣ Miss the communities most exposed Climate change is no longer just about emissions trajectories. It is about distributional impacts, justice, and who pays the price first. This is why granular climate intelligence must sit at the heart of poverty reduction, adaptation, and development strategies. Because climate risk is not abstract. It is local, unequaland already reshaping development outcomes. read the article in Nature here 👇 https://lnkd.in/ehtBmjip

New Frontier Economics & EPICO KlimaInnovation paper on options to reform the EU Emissions Trading System for transport & buildings to make it happen despite affordability concerns. 🟢 𝐂𝐨𝐧𝐭𝐞𝐱𝐭: 𝐏𝐥𝐚𝐧𝐧𝐞𝐝 𝐢𝐧𝐭𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐨𝐟 𝐄𝐓𝐒2 𝐢𝐧 2027 ETS2 is the EU cornerstone for cutting carbon in two of the hardest-to-abate sectors. By putting a price on CO2 emissions, it can spark clean innovation and accelerate the shift to net zero at the lowest cost. ⚠️ 𝐁𝐮𝐭 𝐄𝐓𝐒2 𝐢𝐬 𝐮𝐧𝐝𝐞𝐫 𝐟𝐢𝐫𝐞 Several Member States - especially in Central & Eastern Europe - fear that high CO2 prices could hit households and small industries too hard. Some want to delay or even scrap the system altogether. And concerns are reasonable: If we take the current ETS2 forward price at EEX for 2027 of 85€/t (though at zero liquidity, so don't overrate it) as an example, an average household with 15,000 kWh/yr heating gas consumption has to bear 250€ extra per year (even more if heating with oil). Plus roughly the same if they drive an average petrol car with 20,000 km/yr. So ~500€ per year or ~40€ per month. From 0 today in countries that don't have CO2 pricing yet (other than e.g. Germany that already has a national CO2 price of 55€/t). So quite a hefty sum, particularly for low-income households. And little time - and for some little opportunity - to react for example by switching heating, flats or cars. Worth noting that in ETS2 all certificates will be allocated via auction from day 1. In contrast to ETS1, where many certificates have been allocated for free at the start (and some still are) to release the burden. 🤝 𝐎𝐮𝐫 𝐬𝐭𝐮𝐝𝐲 𝐚𝐧𝐚𝐥𝐲𝐬𝐞𝐬 𝐨𝐩𝐭𝐢𝐨𝐧𝐬 𝐟𝐨𝐫 𝐜𝐨𝐦𝐩𝐫𝐨𝐦𝐢𝐬𝐞 In a short paper published in June, we proposed a mechanism to frontload some ETS2 auction revenues by a few years to allow for early #decarbonisation investments and compensation for vulnerable groups. In our new Policy Report we analyse further reform options. We find that an additional key element to smoothen the sudden financial burden is to flex the Market Stability Reserve (#MSR). This instrument, long-proven to stabilise CO2 prices in ETS1, is already foreseen in ETS2, but with strict conditions & limited until 2030. It foresees, for example, a 'soft cap' for CO2 certificates of 45€/t, so whenever the price exceeds that threshold additional certificates will be released to reduce the price. However, the number of additional certificates is low (20 mn tons). Similarly, triggers of the 'volume-based' MSR mechanism are rigid. We propose to flex them and make them more responsive. Plus we suggest to extend the MSR beyond 2030. 🔗 Full report here: https://lnkd.in/ej7id8Hr 🙏 A big thank you to my Frontier co-authors Maximiliane Reger, Patrick Peichert & Christoph Nodop and to EPICO colleagues Dr. Bernd Weber, Parul Kumar, Simon Munkler and Ayana Trüper for a great cooperation!

The European Commission's 2026 study on the climate transition and public finances arrives at a conclusion that should reframe board-level thinking on sustainability risk: a net-zero trajectory is fiscally sustainable, but the path there will fundamentally restructure how governments raise and spend money. The analysis, conducted using two independent macroeconomic models across all EU member states, finds that revenues lost from declining fossil fuel taxation are more than offset by new income streams, including ETS1, ETS2, the Carbon Border Adjustment Mechanism (CBAM), and the removal of fossil fuel subsidies. The fiscal arithmetic can work. What differs is the distribution of the adjustment. Several findings demand the attention of sustainability leaders, CFOs and board audit committees. The International Monetary Fund estimates climate-related public spending could increase sovereign debt by 10 to 15% of GDP by 2050. Delayed carbon pricing adds a further 0.8 to 2% of GDP annually. For businesses operating across EU jurisdictions, sovereign fiscal stress is not an abstract risk. It translates directly into tax policy volatility, subsidy withdrawal and regulatory uncertainty. Carbon pricing alone could generate revenue equivalent to 0.9% of GDP by 2050, but tax base erosion reduces the net figure available for balancing to just 0.4% without complementary measures. Corporates relying on current tax structures to model long-range cost bases are working with assumptions that will not hold. Member states are not starting from the same position. Poland and Romania remain heavily dependent on EU financing to fund their transition, whilst Denmark and Spain are mobilising domestic public and private capital at scale. Supply chain exposure to high-dependency member states carries regulatory and operational risk that boards should be stress-testing today. The broader message is clear: the transition does not threaten fiscal stability, but it will demand active management of the revenue and expenditure shifts it triggers. Companies that treat this as background noise rather than a strategic input are accepting avoidable risk. Understanding the intersection of climate policy and financial materiality is now a core board competency. Platforms such as Plan A (plana.earth) are built to translate this regulatory and fiscal complexity into the decision-ready data that leadership needs.

Climate change is no longer an environmental debate. It is an economic variable. The Strategic Study on the Economic Impacts of Climate Change in Brazil, developed under the Brazil 2050 Strategy, delivers a clear message: the cost of inaction exceeds the cost of adaptation. Agriculture emerges as one of the primary transmission channels of climate risk to the broader economy. When productivity declines, the effects ripple outward: food inflation, reduced income, food insecurity, and loss of international competitiveness. For this reason, more ambitious climate policies are not a cost. They are economic protection. The 2°C scenario represents a critical inflection point. It requires coordinated action, yet it preserves productive capacity, macroeconomic stability, and food security. Within this space, the private sector plays a decisive role. In our case, this means transforming climate risk into operational efficiency. The Renove Program is a practical example: pasture restoration, sustainable intensification, improved productivity per hectare, and reduced pressure on new natural resources. This is adaptation in the field, with direct impact on emissions, efficiency, and competitiveness. In addition, we continue to advance through: • Consistent investments in renewable energy • Reduction in natural resource use throughout the value chain • Rigorous standards in quality, traceability, and operational efficiency • Innovation applied to sustainable production Food security and climate policy move together. In a world shaped by geopolitical tensions, food is a strategic asset. Access the full study: https://lnkd.in/dq7carKH

Happy to announce a new paper on “Who Bears the Burden of Climate Inaction?” just posted at The Brookings Institution with Kimberly Clausing and Christopher Knittel. 💡 We find large climate cost impacts that vary by both geography and income. 💡 Guided by the literature, we examine several key vectors through which climate inaction affects households. Overall, household damages total nearly $600 by one estimate, and damages reach about $900 for ten percent of households. 💡 In the United States, natural disasters are far more consequential than heat, for both costs and mortality risks. Increased particulate matter from smoke causes many more deaths than temperatures; home insurance price increases are more important than higher cooling costs. 💡 When it comes to climate change, “blue” counties and “red” counties suffer similarly, with slightly higher costs for Trump-voting counties in comparison to Harris-voting counties. 💡 Further, climate policy *inaction* is regressive, harming poorer counties and households disproportionately. Poorer counties are more exposed to risks such as wildfire particulates, and the higher costs of home insurance and cooling are a larger share of income for poorer households. While costs are relatively modest so far, the costs of climate inaction are likely to rise steeply in the years ahead, illustrating the importance of climate action. Even focusing *solely* on US benefits, many climate policy interventions will have benefits that exceed their costs. Huge thanks to Tatyana Deryugina and Wolfram Schlenker for serving as discussants - an especially heavy lift and valuable in the BPEA context! Paper: https://lnkd.in/eKrFDnG7 Conference website, with YouTube link, paper summary, discussant comments and more: https://lnkd.in/eNXPtRar