This paper explores implications of climate change for fiscal policy by assessing the impact of large scale extreme weather events on changes in public budgets. We apply alternative measures for large scale extreme weather events and conclude that the budgetary impact of such events ranges between 0.23% and 1.4% of GDP depending on the country group. Developing countries face a much larger effect on changes in budget balances following an extreme weather event than advanced economies. Based on these findings, our policy conclusions point to the enhanced need to reach and maintain sound fiscal positions given that climate change is expected to cause an increase in the frequency and severity of extreme weather events.
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The views expressed in this paper are those of the authors and not necessarily those of the European Central Bank. The authors would like to thank for very helpful comments and support: the participants of an ECB seminar, Michael Frenkel, Jürgen von Hagen, Michal Slavik, Ad van Riet, Philipp Rother, Jan-Christoph Rülke, Rolf Strauch, Guido Wolswijk and Lilli Zimmermann. Any errors remain the responsibility of the authors.
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Lis, E.M., Nickel, C. The impact of extreme weather events on budget balances. Int Tax Public Finance 17, 378–399 (2010). https://doi.org/10.1007/s10797-010-9144-x