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Fiscal Impacts of Climate Anomalies

Author

Listed:
  • Francesco Jacopo Pintus
  • Jan P.A.M. Jacobs
  • Elmer Sterken
Abstract
The negative effects of climate change on output and productivity have been well documented in recent years. However, its impact on public finances has received little attention. This paper attempts to fill this gap by analysing the impact of climate anomalies on fiscal variables in a macroeconometric framework that also takes into account economic activity. We exploit natural weather variations to construct temperature and precipitation shocks in a panel of 14 European countries and the United States. Impulse response functions from a structural Bayesian Panel VAR show that adverse climate shocks are contractionary and significantly increase public debt and deficits over a business cycle horizon. However, the inflationary impact and the persistence of temperature and precipitation shocks are quite different. The negative fiscal and economic consequences of temperature anomalies are remarkably stronger for warmer, climate-vulnerable and highly indebted countries. Further analysis suggests that the main transmission mechanisms of the reported fiscal impacts are significantly lower tax revenues combined with an increase in government spending on public subsidies.

Suggested Citation

  • Francesco Jacopo Pintus & Jan P.A.M. Jacobs & Elmer Sterken, 2024. "Fiscal Impacts of Climate Anomalies," CAMA Working Papers 2024-74, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2024-74
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    References listed on IDEAS

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    More about this item

    Keywords

    public debt; climate change; panel data; structural Bayesian VAR;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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