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Fiscal effects and the potential implications on economic growth of sea-level rise impacts and coastal zone protection

Abstract

Climate change impacts on coastal zones could be significant unless adaptation is undertaken. One particular macroeconomic dimension of sea level rise (SLR) impacts that has received no attention so far is the potential stress of SLR impacts on public budgets. Adaptation will require increased public expenditure to protect assets at risk and could put additional stress on public budgets. We analyse the macroeconomic effects of SLR adaptation and impacts on public budgets. We include fiscal indicators in a climate change impact assessment focusing on SLR impacts and adaptation costs using a computable general equilibrium model extended with a detailed description of the public sector. Coastal protection expenditure is financed issuing government bonds, meaning that coastal adaptation places an additional burden on public budgets. SLR impacts are examined using several scenarios linked to three different Representative Concentration Pathways: 2.6, 4.5, and 8.5, and two Shared Socioeconomic Pathways: SSP2 and SSP5. Future projections of direct damages of mean and extreme SLR and adaptation costs are generated by the Dynamic Interactive Vulnerability Assessment framework. Without adaptation, all regions of the world will suffer a loss and public deficits increase respect to the reference scenario. Higher deficits imply higher government borrowing from household savings reducing available resources for private investments therefore decreasing capital accumulation and growth. Adaptation benefits result from two mechanisms: (i) the avoided direct impacts, and (ii) a reduced public deficit effect. This allows for an increased capital accumulation, suggesting that support to adaptation in deficit spending might trigger positive effects on public finance sustainability.

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Notes

  1. 1.

    The detailed description of the public sector in the ICES-XPS and the regional aggregation is in Appendix A of the Supplementary Material (SM).

  2. 2.

    The assumption that public debt is always refinanced at a constant rate is in fact a coarse simplification of the real world, ruling out the possibility to link interest rates to perceived changes in the debt-risk profile of a region (more on this on the discussion section). A straightforward alternative would have been to set the interest rate for public debt at the regional rates of return to capital endogenously computed by the CGE model. However, these are in fact decreasing in all our scenarios, as the embedded growth assumptions imply higher capital supply. As a consequence, the burden of the public debt would actually decrease leading perhaps to too optimistic conclusions about debt sustainability. The further option to model a more sophisticated public debt system with international capital markets and a financial module is left to further research.

  3. 3.

    This way to model adaptation rules out the possibility for adaptation (and more generally public) expenditure to be expansive through multiplier effects. The model however is a general equilibrium one, with growth originated by savings and not by Keynesian demand-driven effects. Adding that feature to public adaptation would imply extending, it also to all forms of consumption changing the nature of model.

  4. 4.

    This value is rather arbitrary and derives from assumptions made in Bosello et al. (2012b) on the period of time that people will not be able to work after being affected by river floods. To control for the weight of this assumption we run a sensitivity analysis considering 1, 2, 4, and 6 weeks for the No Adaptation scenario with high SLR. Applying these periods does not change the final outcome of our estimates. There is some variability on impacts at the aggregate level for Northern Europe and Asian countries, but these variations do not change the overall results of our study. As a final remark, it has to be noted that the labour productivity effect represents anyway a minor share (1% to 16%) of the total impact.

  5. 5.

    We acknowledge that the probability of this happening in reality is null. Addressing this would, however, require a quite different approach such as a Monte-Carlo analysis which we plan to address in the future.

  6. 6.

    The regional patterns are from the Greenland and Antarctic ice sheets and their peripheral glaciers and ice caps, plus from the steric contribution of SLR. A global mean value is added to the regionalised components from glaciers and ice caps in other parts of the world.

  7. 7.

    We thank an anonymous reviewer for pointing this out.

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Funding

The authors gratefully acknowledge funding from the European Union under contract number EVK2-2000-22024 to develop the Dynamic Interactive Vulnerability Assessment (DIVA) model. The data was extracted from the model from the Inter-Sectoral Impact Model Intercomparison Project Fast Track funded by the German Federal Ministry of Education and Research (Project 01LS1201A). Further analysis occurred under the European Commission’s Seventh Framework Programme’s collaborative project RISES-AM-(contract FP7-ENV-2013-two stage-603396).

We also acknowledge funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration for the ECONADAPT project under grant agreement no 603906; and from the Italian Ministry of Education, University and Research and the Italian Ministry of Environment, Land and Sea under the GEMINA project.

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Parrado, R., Bosello, F., Delpiazzo, E. et al. Fiscal effects and the potential implications on economic growth of sea-level rise impacts and coastal zone protection. Climatic Change 160, 283–302 (2020). https://doi.org/10.1007/s10584-020-02664-y

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Keywords

  • Adaptation
  • Sea level rise
  • Public budgets
  • Sustainability
  • Climate change
  • Computable general equilibrium