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Integrating physical climate risks into public debt sustainability in the EU Member States

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Institution
European Union - European Commission
Author(s)
Dr. Nicola Gagliardi, European Commission, Directorate‑General for Economic and Financial Affairs, Sustainability of Public Finances and Public Expenditure Trends
Published
Topic Area
The economic and fiscal impacts of climate change
Question
What physical climate risks are there and what are their economic implications?
Citation

European Union—European Commission (2025) Integrating physical climate risks into public debt sustainability in the EU Member States, Contribution to ‘Compendium of Practice from a Global Community of Ministries of Finance and Leading Organizations’, Coalition of Finance Ministers for Climate Action.

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To ensure sound and sustainable public finances, it is essential to provide an order of magnitude of the potential macrofiscal impacts of climate change, while also accounting for their expected timing, persistence, and uncertainty.

Doing so is challenging due to difficulties in conceptualizing and quantifying such issues. The European Commission has developed a stepped approach to the integration of climate change into its standard Debt Sustainability Analysis (DSA), including via an empirical assessment of the potential impact of extreme weather events on public finances, which was undertaken via stylized stress tests.

Key Messages

  • Extreme weather events may pose some risks to debt sustainability, and the adverse fiscal impact increases in higher projected warming scenarios.
  • Impacts of acute physical risks on debt-to-GDP projections appear to be heterogeneous across countries while remaining subject to large uncertainties. The analysis makes simplifying assumptions due to current data and methodological limitations and only provides a partial perspective of climate-related fiscal (debt) sustainability risks, given the focus on the fiscal impact of acute physical risks alone.
  • The results are likely to underestimate the overall expected fiscal impact. This may be due to potential underreporting of economic losses in existing global disaster databases, and the use of lower bound estimates of the expected adverse economic impact from climate events in the EU, along with unaccounted-for risks from nonlinearities and tipping points, potential negative feedback effects across sectors, or adverse spillover effects across countries.
  • Overall, the results emphasize the relevance of implementing large-scale, rapid, and immediate climate mitigation and adaptation measures to dampen the adverse economic and fiscal impacts of potentially more frequent and intense extreme weather events, thereby reducing countries’ exposure, vulnerability, and debt sustainability risks.
Keywords
budgetary processesfiscal impactsfiscal riskinvestment needsrisk assessment