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ISSUE 55 • 2024

T G B

Fiscal Risks of Climate Change

Executive Summary

The ﬁscal risks of climate change facing

countries in Asia and the Paciﬁc are immense.

Climate-related weather disasters and public

spending on the climate change mitigation and

adaptation investments needed to avoid worst-

case climate scenarios and protect livelihoods are

placing a signiﬁcant strain on public ﬁnances. But

governments in Asia and the Paciﬁc are already

taking wide-ranging measures to proactively address

these risks. Countries are analyzing the impact

of climate change risks on their macroeconomic

frameworks, their ﬁnance sectors, and the

sustainability of their public ﬁnances, as well as the

suitability of disaster risk ﬁnancing instruments

depending on their economic conditions.

Governments are using these analyses to build in

ﬁscal buers, better align ﬁscal frameworks with

climate targets, and strengthen public ﬁnancial

management practices more broadly.

This governance brief explores ways that

climate change poses risks to public ﬁnances and a

number of practical solutions to mitigate these risks.

Main takeaways include the following:

(i) Policymakers in Asia and the Pacific have

access to a broad suite of analytical tools that

they can use to better assess the fiscal risks

posed by climate change and to develop ways

to mitigate these risks.

(ii) Many countries in the region already have

experience utilizing these tools and are

generating important lessons learned that

others can consider using these tools.

(iii) These tools can be tailored to each country’s

own needs and challenges in managing the

fiscal risks of climate change.

The table on page  presents common

questions around the ﬁscal risks that climate change

may pose for countries in Asia and the Paciﬁc and

the tools that can help policymakers obtain answers

to these questions and take action.

This study was led and reviewed by Sandeep Bhattacharya, Senior Public Management Specialist (Tax), ADB. The brief was written by Brent

Edelman, Climate Fiscal Policy Expert and ADB consultant. We wish to thank Tariq Niazi, Senior Sector Director, Public Sector Management

and Governance Group; and Hiranya Mukhopadhyay, Director, Public Sector Management and Governance Group, for providing strategic

guidance in the development of this brief. We wish to thank Anjum Israr, Senior Public Management Specialist (Domestic Resource

Mobilization), Public Sector Management and Governance Group; Nanki Kaur, Senior Climate Change Specialist (Climate Change Adaptation),

Climate Change and Sustainable Development Department; and Declan Magee, Principal Economist, Climate Change and Sustainable

Development Department, for peer reviewing the document and providing invaluable comments.

Sources and Practical Solutions

by Brent Edelman

The Governance Brief

Introduction

The Asia and Paciﬁc region is on the frontline of

the battle against climate change. It faces rapid

temperature and sea-level rise and suers the

most weather-related disasters globally. In Asia,

temperatures have risen twice faster than the global

average (NOAA ). Rising sea levels pose

signiﬁcant risks to food security and livelihoods,

especially in low-lying areas like the Mekong

Delta and small Paciﬁc island states. Warmer

temperatures and oceans have increased the

frequency, severity, and unpredictability of weather-

related disasters. At the same time, the region

accounts for close to half of global greenhouse gas

(GHG) emissions and has contributed more than

 of the global growth in carbon dioxide (CO)

emissions since  (Dabla-Norris et al. );

at current levels, Asia would “by itself exhaust the

remaining global carbon budget consistent with

limiting warming to . degrees Celsius (C) by

” (ADB a, p. ).

Acute and chronic physical hazards caused

by climate change present signiﬁcant ﬁscal risks

to countries in Asia and the Paciﬁc. Physical

risks in the form of damage generated by climate

change-induced weather events such as ﬂoods

and storms, which led to  billion annually in

damages between  and  in Asia and the

Paciﬁc (Dabla-Norris et al. ), create a demand

for public resources for humanitarian relief eorts,

cleanup, and the reconstruction of damaged

infrastructure. Such events also disrupt public

revenue inﬂows by halting economic activity in

tourism, agriculture, trade, and other sectors. Risks

of damages from climate shocks further reduce

public revenues by depressing property and asset

valuations.

The transition risks of mitigation eorts in Asia

and the Paciﬁc will also aect government ﬁnances

as countries attempt to reduce reliance on carbon-

based energy sources and increase investment in

clean and renewable energy. Over time, signiﬁcant

additional public outlays will be required for

mitigation actions to limit climate change by

reducing GHG emissions or removing GHGs from

the atmosphere. These investments focus on

making the transition from carbon-based to clean

and renewable energy sources and increasing

energy eciency. Governments will also be required

to increase spending on climate change adaptation

investments to cope with and adjust to the impacts

of climate change. Examples of these investments

include interventions to respond to health and food

security stresses, increase infrastructure resilience,

and improve climate-smart agricultural practices.

At the same time, countries potentially face more

expensive debt loads as rating agencies incorporate

climate risks into sovereign ratings (Volz et al. ).

The urgent need for governments to invest

in climate change adaptation and mitigation

measures comes at a time when public debts are

already strained as a result of three recent major

global crises: the – global ﬁnancial crisis,

coronavirus disease (COVID-), and the Russian

invasion of Ukraine in February . Between

 and , average government debt ratios in

Asia and the Paciﬁc grew from  to  of gross

domestic product (GDP); they are projected to

remain elevated for the next several years (Ferrarini,

Dagli, and Mariano ). And the urgent need

for private ﬁnance to invest where governments

cannot means that the latter need to ensure that

the macro-ﬁscal conditions for climate change

adaptation and mitigation investments are in place.

This short brief explores some of the ways

in which climate change poses risks to public

ﬁnances and a number of practical solutions to

mitigate these risks. It also describes how ﬁscal

risk mitigation can help attract private ﬁnancing

for climate change mitigation and adaptation

investments.

Fiscal Risks of Climate Change

The impacts of climate change on government

ﬁnances range from direct and immediate

(e.g., disaster relief) to indirect and long term

(e.g., sovereign creditworthiness) and include

everything in between. This brief presents these

risks in a way that lends itself to ﬁnding practical

solutions to manage them.

Fiscal Impacts of Climate-Related Weather

Disasters: Macroeconomic Shocks and

Increased Government Liabilities

Climate change is increasing the intensity and

frequency of weather-related disasters in Asia and

the Paciﬁc, arguably as its most immediate and

dramatic impacts. Compared with the more typical

economic shocks that can aect countries, the

impact of disasters can be very large. The Asia and

Paciﬁc region is particularly vulnerable to weather-

related natural hazards. Two of the top three and

seven of the top  most disaster-prone countries

in the world are in the Paciﬁc alone (Cantelmo,

Melina, and Papageorgiou ).

For inquiries, comments,

and suggestions, please

contact Sandeep

Bhattacharya, Senior

Public Management

Specialist (Tax), Public

Sector Management

and Governance

Sector Oce, at

sabhattacharya@adb.

org or +63 2 8632 4622.

Previous issues of The

Governance Brief can be

accessed at http://www.

adb.org/publications/

series/governance-briefs.

ISSUE 55 • 2024 3

And four of the  most damaging disasters

between  and  occurred in Asia and the

Paciﬁc (Cantelmo, Melina, and Papageorgiou ).

When disaster strikes, economic activity comes

to a halt. By one estimate, disaster shocks can be

as large as  of GDP (Cantelmo, Melina, and

Papageorgiou ). In the Philippines, current

annual losses from typhoons alone amount to .

of GDP, and as much as . of GDP in extreme

cases (World Bank a). For governments, less

economic activity and lower productivity mean less

tax revenue from economic activity. Disruptions

to trade ﬂows reduce duty collections. Weather-

related shocks can also aect interest and exchange

rates and commodity prices, which can in turn

aect government spending and revenues

(Schuler et al. ).

Weather disasters can also increase government

liabilities in the form of relief payments to aected

populations, spending on infrastructure repair, or

revenues in response to business interruptions

(ADB b). These disasters regularly trigger

humanitarian crises that necessitate governments to

allocate resources toward search and rescue eorts,

emergency food and shelter, and medical responses.

According to the International Federation of Red

Cross and Red Crescent Societies, the number

of people in need of humanitarian assistance as

a result of the climate crisis could double to over

 million annually by , and response costs

could increase to  billion per year (IFRC ).

Climate-related weather disasters also cause

damage to public assets and infrastructure such as

roads, bridges, and ports. Infrastructure disruptions

alone cost households and businesses in low- and

middle-income countries between  billion

and  billion per year, much of it resulting from

extreme weather events (World Bank a). Such

disasters often impact the operations and ﬁnancial

sustainability of state-owned enterprises (SOEs)

and public–private partnerships. Storms, prolonged

periods of high heat, and coastal inundation can

damage infrastructure and force SOEs to curtail

power generation. This is particularly the case for

Paciﬁc island countries, where SOEs play substantial

roles in small economies facing climate-related

weather risks. In Kiribati, for example, SOEs

accounted for  of GDP in ; SOEs also made

substantial contributions to GDP in the Marshall

Islands (), Tonga () Palau (), Samoa (),

and Solomon Islands () in  (ADB c).

For context, three major typhoons in the past 

years caused an estimated . million in losses for

the Palau Public Utilities Corporation, equivalent to

. of Palau’s annual GDP in  (ADB c).

Foregone payments to governments, reconstruction

costs, and the need to provide bailouts are

contingent liabilities that create additional ﬁscal

risks for governments (Volz et al. ). These

weather event-speciﬁc ﬁscal risks threaten the

creditworthiness of governments in Asia and

the Paciﬁc.

Over time, climate change is eroding the

natural capital foundations of economic activity

in Asia and the Paciﬁc. In economies where

agriculture, forestry, and ﬁsheries are key industries,

climate change threatens to slow productivity

and productive capacity (Agarwala et al. ).

Coral reef loss will have grave impacts on ﬁsheries

and tourism in coastal economies. Agriculture

and aquaculture are threatened by land loss,

ﬂooding, and saltwater intrusion from sea-level

rise, especially in the Western Paciﬁc (Volz et al.

). The loss of biodiversity and ecosystems like

mangroves that serve as buers to climate-related

risks further exacerbates these impacts (Agarwala

et al. ). Under the likeliest cases, global

climate change could reduce economic activity by

– in Asia and – in Oceania between

now and  (Agarwala et al. ).

Fiscal Consequences of Mitigation and

Adaptation Measures

Governments’ commitments to the Paris

Agreement goals to limit temperature rise to

.C require public spending on low-carbon

energy investments, energy eciency, and halting

deforestation. According to the Intergovernmental

Panel on Climate Change (IPCC), energy supply

investments alone range from . trillion to

. trillion annually until  to meet the Paris

Agreement goals (IPCC ). With public climate

ﬁnance averaging around  billion annually,

there is a huge investment gap to address

(UNDP ). Much of this will need to come

from the private sector, donors, and multilateral

development banks, but governments in Asia and

the Paciﬁc will still need to spend signiﬁcantly

more on mitigation and adaptation eorts to meet

their nationally determined contribution (NDC)

commitments required to avoid the worst-case

climate change scenarios.

For Asia and the Paciﬁc to achieve the Paris

Agreement climate goals, the Asian Development

Bank (ADB) estimates that spending on renewable

energy, electricity networks, and storage

infrastructure needs to increase from  billion

in  to an annual average of  billion

/15

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TheGovernanceBriefISSUE55•2024FiscalRisksofClimateChangeSourcesandPracticalSolutionsbyBrentEdelmanExecutiveSummaryThisgovernancebriefexploreswaysthatclimatechangeposesriskstopublicfinancesandaThefiscalrisksofclimatechangefacingnumberofpracticalsolutionstomitigatetheserisks.countriesinAsiaandthePacificareimmense.Maintakeawaysincludethefollowing:Climate-relatedweatherdisastersandpublic(i)PolicymakersinAsiaandthePacifichavespendingontheclimatechangemitigationandadaptationinvestmentsneededtoavoidworst-accesstoabroadsuiteofanalyticaltoolsthatcaseclimatescenariosandprotectlivelihoodsaretheycanusetobetterassessthefiscalrisksplacingasignificantstrainonpublicfinances.ButposedbyclimatechangeandtodevelopwaysgovernmentsinAsiaandthePacificarealreadytomitigatetheserisks.takingwide-rangingmeasurestoproactivelyaddress(ii)Manycountriesintheregionalreadyhavetheserisks.Countriesareanalyzingtheimpactexperienceutilizingthesetoolsandareofclimatechangerisksontheirmacroeconomicgeneratingimportantlessonslearnedthatframeworks,theirfinancesectors,andtheotherscanconsiderusingthesetools.sustainabilityoftheirpublicfinances,aswellasthe(iii)Thesetoolscanbetailoredtoeachcountry’ssuitabilityofdisasterriskfinancinginstrumentsownneedsandchallengesinmanagingthedependingontheireconomicconditions.fiscalrisksofclimatechange.Governmentsareusingtheseanalysestobuildinfiscalbuffers,betteralignfiscalframeworkswithThetableonpage12presentscommonclimatetargets,andstrengthenpublicfinancialquestionsaroundthefiscalrisksthatclimatechangemanagementpracticesmorebroadly.mayposeforcountriesinAsiaandthePacificandthetoolsthatcanhelppolicymakersobtainanswerstothesequestionsandtakeaction.ThisstudywasledandreviewedbySandeepBhattacharya,SeniorPublicManagementSpecialist(Tax),ADB.ThebriefwaswrittenbyBrentEdelman,ClimateFiscalPolicyExpertandADBconsultant.WewishtothankTariqNiazi,SeniorSectorDirector,PublicSectorManagementandGovernanceGroup;andHiranyaMukhopadhyay,Director,PublicSectorManagementandGovernanceGroup,forprovidingstrategicguidanceinthedevelopmentofthisbrief.WewishtothankAnjumIsrar,SeniorPublicManagementSpecialist(DomesticResourceMobilization),PublicSectorManagementandGovernanceGroup;NankiKaur,SeniorClimateChangeSpecialist(ClimateChangeAdaptation),ClimateChangeandSustainableDevelopmentDepartment;andDeclanMagee,PrincipalEconomist,ClimateChangeandSustainableDevelopmentDepartment,forpeerreviewingthedocumentandprovidinginvaluablecomments.2TheGovernanceBriefForinquiries,comments,Introductionsecuritystresses,increaseinfrastructureresilience,andsuggestions,pleaseandimproveclimate-smartagriculturalpractices.contactSandeepTheAsiaandPacificregionisonthefrontlineofAtthesametime,countriespotentiallyfacemoreBhattacharya,Seniorthebattleagainstclimatechange.ItfacesrapidexpensivedebtloadsasratingagenciesincorporatePublicManagementtemperatureandsea-levelriseandsufferstheclimaterisksintosovereignratings(Volzetal.2021).Specialist(Tax),Publicmostweather-relateddisastersglobally.InAsia,SectorManagementtemperatureshaverisentwicefasterthantheglobalTheurgentneedforgovernmentstoinvestandGovernanceaverage(NOAA2020).RisingsealevelsposeinclimatechangeadaptationandmitigationSectorOffice,atsignificantriskstofoodsecurityandlivelihoods,measurescomesatatimewhenpublicdebtsaresabhattacharya@adb.especiallyinlow-lyingareasliketheMekongalreadystrainedasaresultofthreerecentmajororgor+63286324622.DeltaandsmallPacificislandstates.Warmerglobalcrises:the2008–2009globalfinancialcrisis,PreviousissuesofThetemperaturesandoceanshaveincreasedthecoronavirusdisease(COVID-19),andtheRussianGovernanceBriefcanbefrequency,severity,andunpredictabilityofweather-invasionofUkraineinFebruary2022.Betweenaccessedathttp://www.relateddisasters.Atthesametime,theregion2008and2021,averagegovernmentdebtratiosinadb.org/publications/accountsforclosetohalfofglobalgreenhousegasAsiaandthePacificgrewfrom33%to51%ofgrossseries/governance-briefs.(GHG)emissionsandhascontributedmorethandomesticproduct(GDP);theyareprojectedto70%oftheglobalgrowthincarbondioxide(CO2)remainelevatedforthenextseveralyears(Ferrarini,emissionssince1970(Dabla-Norrisetal.2021);Dagli,andMariano2023).Andtheurgentneedatcurrentlevels,Asiawould“byitselfexhausttheforprivatefinancetoinvestwheregovernmentsremainingglobalcarbonbudgetconsistentwithcannotmeansthatthelatterneedtoensurethatlimitingwarmingto1.5degreesCelsius(°C)bythemacro-fiscalconditionsforclimatechange2040”(ADB2023a,p.1).adaptationandmitigationinvestmentsareinplace.AcuteandchronicphysicalhazardscausedThisshortbriefexploressomeofthewaysbyclimatechangepresentsignificantfiscalrisksinwhichclimatechangeposesriskstopublictocountriesinAsiaandthePacific.Physicalfinancesandanumberofpracticalsolutionstorisksintheformofdamagegeneratedbyclimatemitigatetheserisks.Italsodescribeshowfiscalchange-inducedweathereventssuchasfloodsriskmitigationcanhelpattractprivatefinancingandstorms,whichledto$50billionannuallyinforclimatechangemitigationandadaptationdamagesbetween2010and2019inAsiaandtheinvestments.Pacific(Dabla-Norrisetal.2021),createademandforpublicresourcesforhumanitarianreliefefforts,FiscalRisksofClimateChangecleanup,andthereconstructionofdamagedinfrastructure.SucheventsalsodisruptpublicTheimpactsofclimatechangeongovernmentrevenueinflowsbyhaltingeconomicactivityinfinancesrangefromdirectandimmediatetourism,agriculture,trade,andothersectors.Risks(e.g.,disasterrelief)toindirectandlongtermofdamagesfromclimateshocksfurtherreduce(e.g.,sovereigncreditworthiness)andincludepublicrevenuesbydepressingpropertyandasseteverythinginbetween.Thisbriefpresentsthesevaluations.risksinawaythatlendsitselftofindingpracticalsolutionstomanagethem.ThetransitionrisksofmitigationeffortsinAsiaandthePacificwillalsoaffectgovernmentfinancesFiscalImpactsofClimate-RelatedWeatherascountriesattempttoreducerelianceoncarbon-Disasters:MacroeconomicShocksandbasedenergysourcesandincreaseinvestmentinIncreasedGovernmentLiabilitiescleanandrenewableenergy.Overtime,significantClimatechangeisincreasingtheintensityandadditionalpublicoutlayswillberequiredforfrequencyofweather-relateddisastersinAsiaandmitigationactionstolimitclimatechangebythePacific,arguablyasitsmostimmediateandreducingGHGemissionsorremovingGHGsfromdramaticimpacts.Comparedwiththemoretypicaltheatmosphere.Theseinvestmentsfocusoneconomicshocksthatcanaffectcountries,themakingthetransitionfromcarbon-basedtocleanimpactofdisasterscanbeverylarge.TheAsiaandandrenewableenergysourcesandincreasingPacificregionisparticularlyvulnerabletoweather-energyefficiency.Governmentswillalsoberequiredrelatednaturalhazards.Twoofthetopthreeandtoincreasespendingonclimatechangeadaptationsevenofthetop20mostdisaster-pronecountriesinvestmentstocopewithandadjusttotheimpactsintheworldareinthePacificalone(Cantelmo,ofclimatechange.ExamplesoftheseinvestmentsMelina,andPapageorgiou2019).includeinterventionstorespondtohealthandfoodISSUE55•20243Andfourofthe15mostdamagingdisasters1.4%ofPalau’sannualGDPin2021(ADB2023c).between1998and2017occurredinAsiaandtheForegonepaymentstogovernments,reconstructionPacific(Cantelmo,Melina,andPapageorgiou2019).costs,andtheneedtoprovidebailoutsarecontingentliabilitiesthatcreateadditionalfiscalWhendisasterstrikes,economicactivitycomesrisksforgovernments(Volzetal.2021).Thesetoahalt.Byoneestimate,disastershockscanbeweatherevent-specificfiscalrisksthreatentheaslargeas50%ofGDP(Cantelmo,Melina,andcreditworthinessofgovernmentsinAsiaandPapageorgiou2019).InthePhilippines,currentthePacific.annuallossesfromtyphoonsaloneamountto1.2%ofGDP,andasmuchas4.6%ofGDPinextremeOvertime,climatechangeiserodingthecases(WorldBank2022a).Forgovernments,lessnaturalcapitalfoundationsofeconomicactivityeconomicactivityandlowerproductivitymeanlessinAsiaandthePacific.Ineconomieswheretaxrevenuefromeconomicactivity.Disruptionsagriculture,forestry,andfisheriesarekeyindustries,totradeflowsreducedutycollections.Weather-climatechangethreatenstoslowproductivityrelatedshockscanalsoaffectinterestandexchangeandproductivecapacity(Agarwalaetal.2021).ratesandcommodityprices,whichcaninturnCoralreeflosswillhavegraveimpactsonfisheriesaffectgovernmentspendingandrevenuesandtourismincoastaleconomies.Agriculture(Schuleretal.2019).andaquaculturearethreatenedbylandloss,flooding,andsaltwaterintrusionfromsea-levelWeatherdisasterscanalsoincreasegovernmentrise,especiallyintheWesternPacific(Volzetal.liabilitiesintheformofreliefpaymentstoaffected2021).Thelossofbiodiversityandecosystemslikepopulations,spendingoninfrastructurerepair,ormangrovesthatserveasbufferstoclimate-relatedrevenuesinresponsetobusinessinterruptionsrisksfurtherexacerbatestheseimpacts(Agarwala(ADB2023b).Thesedisastersregularlytriggeretal.2021).Underthelikeliestcases,globalhumanitariancrisesthatnecessitategovernmentstoclimatechangecouldreduceeconomicactivitybyallocateresourcestowardsearchandrescueefforts,15%–20%inAsiaand11%–12%inOceaniabetweenemergencyfoodandshelter,andmedicalresponses.nowand2050(Agarwalaetal.2021).AccordingtotheInternationalFederationofRedCrossandRedCrescentSocieties,thenumberFiscalConsequencesofMitigationandofpeopleinneedofhumanitarianassistanceasAdaptationMeasuresaresultoftheclimatecrisiscoulddoubletooverGovernments’commitmentstotheParis200millionannuallyby2050,andresponsecostsAgreementgoalstolimittemperaturerisetocouldincreaseto$20billionperyear(IFRC2019).1.5°Crequirepublicspendingonlow-carbonenergyinvestments,energyefficiency,andhaltingClimate-relatedweatherdisastersalsocausedeforestation.AccordingtotheIntergovernmentaldamagetopublicassetsandinfrastructuresuchasPanelonClimateChange(IPCC),energysupplyroads,bridges,andports.Infrastructuredisruptionsinvestmentsalonerangefrom$1.6trilliontoalonecosthouseholdsandbusinessesinlow-and$3.8trillionannuallyuntil2050tomeettheParismiddle-incomecountriesbetween$391billionAgreementgoals(IPCC2018).Withpublicclimateand$647billionperyear,muchofitresultingfromfinanceaveragingaround$253billionannually,extremeweatherevents(WorldBank2019a).Suchthereisahugeinvestmentgaptoaddressdisastersoftenimpacttheoperationsandfinancial(UNDP2021).Muchofthiswillneedtocomesustainabilityofstate-ownedenterprises(SOEs)fromtheprivatesector,donors,andmultilateralandpublic–privatepartnerships.Storms,prolongeddevelopmentbanks,butgovernmentsinAsiaandperiodsofhighheat,andcoastalinundationcanthePacificwillstillneedtospendsignificantlydamageinfrastructureandforceSOEstocurtailmoreonmitigationandadaptationeffortstomeetpowergeneration.Thisisparticularlythecasefortheirnationallydeterminedcontribution(NDC)Pacificislandcountries,whereSOEsplaysubstantialcommitmentsrequiredtoavoidtheworst-caserolesinsmalleconomiesfacingclimate-relatedclimatechangescenarios.weatherrisks.InKiribati,forexample,SOEsaccountedfor15%ofGDPin2020;SOEsalsomadeForAsiaandthePacifictoachievetheParissubstantialcontributionstoGDPintheMarshallAgreementclimategoals,theAsianDevelopmentIslands(9%),Tonga(6%)Palau(5%),Samoa(4%),Bank(ADB)estimatesthatspendingonrenewableandSolomonIslands(4%)in2020(ADB2023c).energy,electricitynetworks,andstorageForcontext,threemajortyphoonsinthepast10infrastructureneedstoincreasefrom$397billionyearscausedanestimated$3.7millioninlossesforin2021toanannualaverageof$707billionthePalauPublicUtilitiesCorporation,equivalentto4TheGovernanceBriefuntil2050,whichcorrespondsto1.5%–2.7%oftoknowhowtheyareexposedtoclimateevents”GDPfortheeconomiesincludedintheanalysis.(Tigue2019).Climatechangecanincreasethe(ADB2023a).Accordingtoanotherestimate,riskinessofsovereigndebtthroughacomplexIndonesiarequiresanadditional$323billionincombinationofthechannelsmentionedabove,energysectorinvestmentsalonebetweennowanddependingonthemeasurestaken(ornottaken)2030toachieveitsNDCs(ADB2023e).Publictomitigatetheserisks.Thephysicalrisksofspendingonothermitigationmeasures,especiallyclimatechangewillverylikelyaffecteconomicinbiggeremittingandmoreheavilyforestedactivity,employment,andpublicfinances.TheAsiancountries,willplaceadditionalstrainontransitionrisksofmitigationeffortswillaffectgovernments’publicfinances.economiesthroughshiftsinconsumptionpatterns,technologies,andclimatepoliciesaseconomiesAdaptationinvestmentstoprotectpeople,attempttoreducerelianceoncarbon-basedenergyprivateproperty,andpublicinfrastructurefromsourcesandinvestmoreincleanandrenewablethephysicaleffectsofclimatechangewillburdenenergy(Volzetal.2021).governmentsevenmore.AccordingtotheInternationalMonetaryFund(IMF),globalpublicAndresearchbacksthisup.Astudyof49highlyadaptationneedsbetweennowand2030arevulnerablecountries’sovereigncreditratingsfound0.25%ofglobalGDPperyear(Aligishiev,Massetti,thatclimatevulnerabilityincreaseddebtcostsbyandBellon2022).Investmentinadaptationis117basispoints(Klingetal.2018).Accordingtoestimatedtocostanannual$160billiontoanotherstudyof40developedandemerging$340billionindevelopingcountriesby2030andeconomies,“[p]remiaonsovereignbondyields$315billionto$565billionby2050(UNEP2022).amounttoaround275basispointsforeconomiesThisismuchhigherthanthecurrent$49billionhighlyexposedtoclimaterisk”butclimateriskhasinvestedinadaptationglobally(Naranetal.2022).noperceptibleimpactonadvancedeconomiesForAsiaandthePacific,theseinvestmentsareoverall(Volzetal.2021,p.ix).Clearly,theimmediate-estimatedtocostnearlythreetimesasmuchtermfiscalrisksofclimate-inducedweather(0.7%ofGDPannually)from2021to2025.1events,medium-termfiscalrisksassociatedwith(Dabla-Norrisetal.2021).Countriesneedtomacroeconomicandfinancialimpacts,andfiscalclimate-proofcriticalinfrastructuresuchasimplicationsofmitigationandadaptationmeasuresroads,ports,andtelecommunicationsnetworks.aremakingitmoreexpensivefordevelopingGovernmentsneedtostrengthensocialsafetycountriesinAsiaandthePacifictoborrow.netstorespondtotheacuteandchronicimpactsofclimatechange,includingdisasterresponsePracticalSolutionstoMitigateandsea-levelrise,andinvestinclimate-smartMacro-FiscalRisksAssociatedagricultureandblueeconomyadaptationstowithClimateChangesustainlivelihoods.ThisisespeciallythecaseforPacificislandcountriesonthefrontlinesofWhiletherearenoeasypolicyfixes,thereareclimatechange,inpartbecauseoftheirexpensiveseveralpracticalstepsgovernmentsinAsiaandthecoastalprotectioninfrastructureneeds.ByonePacificcantaketomitigatetheserisks.Basedonaestimate,Pacificislandcountriesneedtospendglobalreviewofinternationalbestpractices,ADBapproximately$1billionperyearoverthenexthasidentifiedathree-stepframeworktostrengthen10yearsforpublicandprivateadaptationcapacityforclimate-resilientfiscalmanagementinvestmentstoupgradenewprojects,retrofit(ADB2023b):existingassets,anddevelopcoastalprotection(i)Climatefiscalriskassessment:riskinfrastructure(Fouadetal.2021).identification,modeling,anddisclosureSovereignRiskConsequences(ii)Climatefiscalriskmanagement:riskofClimateChangeAccordingtoMoody’s,whichrecentlypurchasedassignmentandinvestment(riskreduction,alargestakeinadatafirmspecializinginclimatetransfer,retention)risks,“[m]oreandmore,issuersandinvestorswant(iii)Resourceoptimization:publicandprivateresourcemobilizationandmanagementNote:Inthispublication,“$”referstoUnitedStatesdollars.1ThesecostsarewellbelowspendingonfossilfuelsubsidiesindevelopingAsia,estimatedtobe1%ofGDPfortheregion(ADB2023a).ISSUE55•20245Followingthesestepscanhelpinminimizingconsolidatedinformationonthecostingandmacro-financialrisk,buildingcapacitytomanagefundinggapsofadaptationplansatthenationalrisk,puttingcontingencyplansinplace,andlevelcouldfurtherfacilitatediscussionswithattractingprivatefinanceforinvestmentsinpotentialinvestorsinadaptationmeasures.Itmitigationandadaptation.Thissectionpresentsalsorecommendstaxreformssuchasfeebatestoanoverviewofthisframeworkandseveralpracticalencouragethetake-upoffuel-efficientcarsandtoolsthatgovernmentscanusetoworkwithinit.energy-efficientappliancestohelpSamoaachieveitsmitigation-relatedNDCs(IMF2022).Identify,Model,andDiscloseModelClimateRisksClimatechangeisexposingMadagascar,theTostart,governmentsinAsiaandthePacificcanCMAP’ssecondpilotcountry,tohazardsincludingtakestepstounderstandvulnerabilitypointsdroughts,floods,cyclones,moreunpredictableforpublicfinances,themacroeconomy,andtherainfalls,andmoreextremeheatevents.Keysectorsfinancialsystemwhenitcomestoclimatechange.oftheeconomy,includingagriculture,waterandUnderstandingtheserisksiskeytoplanningforsanitation,terrestrialandmarineecosystems,andandmanagingdisasterresponseandmitigationinfrastructureandbuildings,havealreadybeenandadaptationinvestments.FortunatelyforsignificantlyharmedbyclimatechangeandstandgovernmentsinAsiaandthePacific,therearetobefurtherdamagedinthefuture.Andyetthemultipletoolsattheirdisposal.2country’smacroeconomicandfiscalprojectionsdonotaccountforclimate-relatedrisks,creatingAusefulstartingpointistounderstandthesignificantfiscalrisks:governmentexpendituresimpactofclimatechangerisksonacountry’sonhumanitarianandreconstructionneedsaftermacroeconomicframeworkandlong-termoutlook.disastersunderaclimate-adjustedmacroeconomicTheIMF’sClimateMacroeconomicAssessmentscenariowouldpushgovernmentdebttoanProgram(CMAP)looksatclimateriskandunsustainablelevelofmorethan85%ofGDPbypreparedness,nationalstrategy,mitigation,risk2040.OnequickCMAPpolicyrecommendationmanagement,adaptation,themacroeconomicisforthegovernmenttotreatdisastersasimplicationsofclimatechange,andpublicfinancialcomponentsofMadagascar’sbaselineprojectionsmanagement(PFM)practices(Sakraketal.2022).byprojectingeconomicimpactsbasedonhistoricalAnewdiagnostictoolthatbuildsontheIMF’sdataandresearch-basedassumptions(IMF2023a).ClimateChangePolicyAssessmentdiagnostictool,TheIMFhasusedfindingsfromtheSamoaandtheCMAPaddsdistributionalimpactsofmitigationMadagascarpilotstorefinefutureCMAPs(Box1).policies,SustainableDevelopmentGoalclimatecosting,andimpactsofdisasterstodeveloppolicyTheWorldBank’sFiscalSustainabilityAnalysisrecommendationstocopewiththemacro-fiscal(FSA)isasimple,spreadsheet-basedtoolthatcanimpactsofacuteandslow-movingclimatechange-assessthesustainabilityofacountry’sfiscalpolicies,inducedeffects(IMF2023a).includingthegovernment’sdebtstrategyandmedium-termmacroeconomicandfiscalframeworkFindingsfromaCMAPconductedinSamoa—andkeymacroeconomicvariables,inthefaceoftheCMAP’sfirstpilotcountry—in2021indicatedisasters.Itcanalsoprovideimportantlessonsonthateconomicdamagecausedbydisastershashowcountriescanstructurecontingentfinancingaveraged30%ofGDPperdisasteroverthepast4forsuchdisasters.InJamaica,forexample,theFSAdecades.Samoa’sdebt-to-GDPratioisexpectedfindsthattheshockstoGDP,revenue,andspendingtotrendupwardoverthenext20years,crossingcausedbyanincreasedlikelihoodofanextremethedebtsustainabilityanalysisthresholdof70%ofclimatechange-inducedweathereventwouldGDPby2034.Andslow-movingclimatestressespushthefiscalbalancewelloffitstarget.Italsolikerisingtemperaturescouldlowerthelong-showshowtheuseofwidelyavailablecontingencytermgrowthofimportantsectorsoftheeconomyfinancingarrangements,suchascontingencylinessuchastourism,agriculture,andfisheries.TheofcreditandcatastrophicriskinsurancethatcanbeCMAPalsofindsthat,whileSamoa’snationalarrangedinadvanceanddeployedquickly,positionsstrategydocumentsreflectitsstrongcommitmentthegovernmenttorelylessonnewcommercialtoclimate-resiliencebuildinganditsdisasterborrowingforrecoveryandreconstruction.Inthemanagementplanningiswelldeveloped,havingcaseofJamaica,thedebt-to-GDPratiocontinues2TheIMFrecentlylaunchedanonlinetrainingcoursetailoredtoofficialsinfinance,economy,andplanningministriesthatprovidesanoverviewofclimateriskanalysisframeworks(IMF2023b).6TheGovernanceBriefBox1:TheFutureoftheIMF’sClimateMacroeconomicandsoundnessandassessitspotentialcontributionAssessmentProgramtogrowthanddevelopment.Inrecentpilots,theIMFhasintegratedtemperature,emissions,andTheInternationalMonetaryFund’s(IMF’s)recentreviewofitsfirsttwoclimatescenariosintoitsbanksolvencystressClimateMacroeconomicAssessmentProgram(CMAP)pilotsinSamoatestingframeworkforcountrieswhereclimateandMadagascarproducedthefollowingfindingsandproposedwaysrisksareanimportantconsiderationasaresultofforward:elevatedsourcesoftransitionrisk(carbontaxgap,shareofthecarbon-intenseindustry,etc.)•Themacro-fiscalsectionoftheCMAPwasmostvaluabletoand/orphysicalrisk(changeinhazards’projectionspilotcountrygovernmentsbutitscomprehensivenaturemeansrelativetohistory,damagesasaresultofdifferentitcouldalsostrainlimitedgovernmentcapacity.hazards,etc.)(Adrianetal.2022).•TheCMAPrequiressignificantlymoreresourcesthandotypicalInits2021FSAP,thePhilippinespilotedtheIMFcountrydiagnosticmissions/products.impactofphysicalrisk—intheformofincreasedtyphoonintensityandfrequency—onthefinance•FutureCMAPeffortsshouldfocusonmitigation,publicfinancialsectorandtheeconomy.Accordingtotheanalysis,management,andthemacro-fiscalimplicationsofclimateaonce-in-500-yeartyphooneventwouldreducechangepoliciesandshouldbetailoredtocountries’individualthebankcapitalratioby1percentagepointinneedsandsituations(IMF2023a).theabsenceofapandemicand/orjointshock.Withajointshock,thereductioninthebankSource:IMF2023a.capitalratioincreasesto4.5percentagepoints.Tomitigatethisrisk,theBangkoSentralngPilipinasdownwardwithcontingencyfinancingandriskhasalreadystartedtointegrategreenfinanceandinsuranceinplacedespitetheweatherevent’senvironmental,social,andcorporategovernancenegativeimpactonGDPandincreasedfiscalprinciplesintoitsinvestmentpolicyandplanstoburden,animportantfindingforotherhighlyenhancesupervisorycapacitytoensurethatbanksindebtedgovernments(Schuleretal.2019).incorporateenvironmentalriskmanagement,governance,anddisclosure(IMF2021a).Chile’sInthecaseoftheDominicanRepublic,recentFSAPassessedthattheimpactoffloodsandacountrywithlimitedfiscalspacerootedindroughts,estimatedtobe2%ofGDP,hadainadequaterevenuecollection,amoderatedisaster0.1percentagepointreductionintheaggregateshockcouldleadtoincreasesindebtserviceofcapitalratioforbanks.Chile’sFSAPalsofound0.5%ofGDP,roughlyequivalenttothecostofthathighercarbontaxes,intheformofaone-offincreasinghealthcoveragetoallDominicanslivingincreaseto$100pertonneofCO2,wouldincreaseunder$4purchasingpowerparity(PPP)perday;theaverageprobabilityofdefaultby0.7percentageforashockofhistoricallyextremeproportions,pointsafter5yearsandreducecapitalratiosbythisfigurerisesto1.0%ofGDP,almosttheamount0.5percentagepoints.AndinSouthAfrica,aneededtofillboththehealthandeducationsuddenandlargeriseinthepriceofcarbonfromacoveragegapsforDominicanslivingunderthecarbontaxwouldincreasecorporatedebtfrom$4PPPperdaythreshold.Thesefindingshighlight30%to60%(Adrianetal.2022).theneedforcountriesvulnerabletoclimate-relatedweatherriskstoavoidsuchexpensiveincreasesOncetheserisksarebetterunderstood,indebtservicingcostsbymaintainingsufficientgovernmentscanhelpensurefiscalsustainabilityfiscalspacetofinancerecoveryandreconstructionbypubliclydisclosingthisinformationsothatitis(Schuleretal.2019).broadlyavailableandwidelyused.SuchdisclosurescanimprovecreditworthinessandbuildmarketAsnotedearlier,therisksclimatechange-confidence.Initsannualfiscalriskstatement,forrelatedshocksposetothefinancesectormakeitexample,thePhilippinesincludesasectionwithimportantforcountriestounderstandtheimpactofestimatesoftheeconomicimpactsofdisasterandclimatechangeonbankingsectorstability.TheIMFfundingtoaddresstheseimpacts.Thesepublichasrecentlyincorporatedclimateriskanalysisintodisclosureshelpreassurethepublicthatclimate-itsFinancialSectorAssessmentPrograms(FSAPs),relatedrisksareacknowledgedandbeingmanagedatoolusedtogaugethefinancesector’sstabilityalongwithotherfiscalrisks(ADB2023b).ISSUE55•20247DevelopFinancingMechanismstoManageeconomicconditions,theenablingenvironmentFiscalRisksfromClimateChangefordisasterriskfinancing,andthedisasterriskGovernmentscanusethisknowledgetobuildmanagementstrategy.ADB’scountrydiagnosticsinfiscalbuffersthataccountfortheserisks.ThetoolkitforassessingtheenablingenvironmentformostcommonexamplesofdisasterfinancingaredisasterriskfinancingcanhelpgovernmentsincontingentlinesofcreditextendedbyinternationalAsiaandthePacificidentifyandplandisasterriskfinancialinstitutionstosupportrelief,recovery,financinginstrumentssuitabletothelocalmarketandreconstructionafteradisasteroccursanddisasterrisklandscape(ADB2020b).InFiji,(Volzetal.2021).Inoneexample,theWorldforexample,modelingpredictsseverelossesasaBankrecentlyprovidedthePhilippineswitharesultoftropicalstorms,earthquakes,andtsunamis,$500millioncontingentlineofcredittomanagewitha50%chanceofexperiencinglossesexceedingfinancialimpactsbroughtaboutbydisasters$670millionanda10%chanceofexperiencing(WorldBank2021a).In2020,ADBannouncedlossesexceeding$1.34billioninthenext50years.anadditional$94millionincontingentdisasterThediagnosticstoolkitrecommendsthatthefinancingtoboostfiscalresiliencetodisastersingovernmentdevelopacomprehensiveregisterofalltheCookIslands,theFederatedStatesofgovernment-ownedinfrastructureandotherassets,Micronesia,Kiribati,theMarshallIslands,improveunderwritingstandardstoacceptmorePalau,Samoa,SolomonIslands,Tonga,Tuvalu,catastrophicrisk,andconsidercatastrophebondsandVanuatu(ADB2020d).asanadditionaldisasterriskfinancinginstrument(ADB2019a).DisasterinsuranceisanothertypeoffinancialrisktransfersolutionthatcountriescanusetoBox2:PooledDisasterInsuranceinthePhilippines—ACaseprotectpublicfinancesagainstclimaterisks,Studyespeciallythosewithlowprobabilityandhighseverity,suchasmajorfloodsandtropicalcyclonesClimatechangeposesextremeriskstothePhilippines’ambitionsto(Surminski,Panda,andLambert2019).ThePacificbecomeahigh-incomeeconomyby2045.ExtremeweathereventsandCatastropheRiskFinancingInitiative,anearlytemperatureandsea-levelriseareprojectedtodamageinfrastructurepilot,provideddisasterinsuranceforPacificislandandsloweconomicactivity.In2022,thePhilippinesrankedsixthinthecountriesinthecaseoftsunamisandtropicalworldforcountriesmostaffectedbyextremeweatherevents(Statistacyclones(WorldBank2015).Disastersalsocreate2022).TyphoonsaloneareestimatedtocauseGDPlossesof1.2%risksforsubnationalgovernmentfinances.Pooledannually,andasmuchas4.6%inextremecases.Withoutaction,climateinsurancefordisasterresponseatthesubnationalchangecouldcauseeconomicdamagesofupto7.6%ofGDPby2030governmentlevel—suchasapooledinsuranceand13.6%ofGDPby2040(WorldBank2022a).schemecurrentlybeingdevelopedatthelocalgovernmentunitlevelinthePhilippines—canWhilegovernmentscannotcontrolthemagnitudeorfrequencyofenablelocalgovernmentstobettermanagedisasterdisasters,theycantakestepstoputinplacedisasterrisktransferriskandquicklyrehabilitatecriticalinfrastructuremechanismssuchasinsurance.Severalcountrieshaveestablishedwhendisastersstrike(Box2)(ADB2018).disasterinsuranceatthenationallevel.InthePhilippines,localgovernmentunitsandtheAsianDevelopmentBankareworkingCountriescanalsoissuecatastrophe-linkedtogethertonarrowthefundinggapbetweenavailablefundsandpost-bonds(catbonds)thatallowgovernmentstodisasterresponseandrecoverycostsatthelocallevel.ThePhilippinereceivepayoutsinthecaseofaqualifyingdisasterCityDisasterInsuranceProject(PCDIP)willsupportcitiestomanageeventinexchangeforpayingapremiumforthedisasterriskandrehabilitateassetsandinfrastructurepost-disastercovertocatbondinvestorswillingtobetagainstbypoolingrisksamongthecitiesthatpurchaseinsuranceagainstdisasterstakingplaceatacertaintime.In2019,weatherdisasters.ThispoolingarrangementreducespremiumcostsbytheWorldBankissuedacatbondtoprovidethediversifyingriskandsharingadministrativecosts.ThefirstofitskindonGovernmentofthePhilippineswithfinancialacitylevel,thePCDIPwillprovidePhilippinecitieswithcost-effective,protectionofupto$150millionagainstlossesfromparametricinsurancethatprovidesnear-immediate(withinafewdaystropicalcyclonesfor3years(WorldBank2019b).toaweek)payoutsforpost-disasterresponse(ADB2018).In2021,theGovernmentofJamaicabecamethefirstsmallislandstategovernmenttoissueacatSources:Statista2022;WorldBank2022a;ADB2018.bondwhenitissueda$185millioncatbondforlossesfromtropicalcyclones(WorldBank2021b).Ingeneral,thesuitabilityofdisasterriskfinancinginstrumentsdependsinlargepartonacountry’s8TheGovernanceBriefInSriLanka,disasterscauseanestimatedhelpattractprivatecapitalbyreducingfiscaland$380millioninannualexpectedlossestohousing,macroeconomicriskstogovernance.Suchmeasuresroads,andreliefspending(WorldBank2016).canalsopositioncountriestoissuesustainableTheSriLankangovernmentacknowledgedtheneedbonds—suchasgreenandbluebonds—tochanneltoaddressfinancialchallengesinprovidingpost-privatefinancetoadaptationinvestments.disasterassistanceandbettermanagingbudgetrisks,includinglimitedex-antefinancingarrangementsCountriesmostinneedofadditionalfinancinginplaceforpost-disasterresponse,noassessmentoftenstruggletogaintheNationalImplementingforgovernment-ownedinfrastructureandassetsEntityaccreditationneededtoaccessconcessionaryexposedtonaturalhazards,andtheadhocuseoffinancingthroughclimatefundssuchastheGlobaldisasterrisktransferinstruments.ToclosetheseEnvironmentFacilityandtheGreenClimategaps,ADB’scountrydiagnosticstoolkitforassessingFundbecausetheylackadministrative,financial,theenablingenvironmentfordisasterriskfinancingprogrammanagement,environmentalandsocialrecommendationsincludethefollowing:assessstandardsperformancemanagement,and/orauditthestateofdisasterriskmappingandmodeling;capabilities(Fouadetal.2021).Projectdesignstudythepotentialfortheuseofdisasterriskloans;challengesandthelackoffiscalspacetoborrowcananddevelopapolicyontheuseofrisktransferalsoimpedecountries’attemptstoattractprivateinstrumentsfordisasterriskfinancing(ADB2019b).andconcessionaryfinancingforinvestmentsinclimatechangeadaptationandmitigationmeasures.OptimizePublicandPrivateResourceProjectapprovalcriteriatoaccessconcessionaryMobilizationandManagementfinancingthroughclimatefundscanbecomplex.GovernmentscanfurthermitigatethefiscalrisksChallengesofassessingtheclimate-relatedrisksofclimatechangebyensuringthatstrategicplansandbenefitsofadaptationinvestmentprojectsandfiscalframeworksalignwithclimatetargetscanmakeitdifficulttostructurefinancingforsuchandobjectives(Sakraketal.2022).Fiscalpoliciesprojects.Andcapacityconstraintsofoverstretchedanddevelopmentprioritiescanintegratestrategiesgovernmentofficials,especiallyinPacificislandtocombatclimatechange,includingNDCsandcountries,canlimitcountries’abilitytodesignandclimateaspectsofSustainableDevelopmentGoals,executeapipelineofadaptationinvestmentprojectsintomedium-termplanningandbudgetallocations.(Fouadetal.2021).CountrieslikeKiribatihaveGovernmentscanputinplacePFMprocessesdedicatedadditionalgovernmentstaffandresourcesthatsupportthedesignandimplementationoftoincreaseengagementwithclimatefundsandthesefiscalpoliciesandframeworksandensureovercomesomeofthesechallenges(Box3).transparencyofpublicfinances(Sakraketal.2022).ByensuringthatfiscalplanningandPFMpracticesOnepotentialfirststeptostrengthengreenincorporateclimatechangeobjectives,governmentsPFMpracticescouldbetosystematicallyanalyzecanmaximizetheeffectivenessoflimitedpublicthecountry’spublicexpenditures,policies,andresourcesandminimizefiscalrisksassociatedwithpublicagencies’institutionalframeworksinrelationclimatechange.toclimatechangethroughaClimatePublicExpenditureandInstitutionalReview(CPEIR).EffectivePFMpracticescanalsohelpcountriesDevelopedbytheUnitedNationsDevelopmentaccessprivateand/orconcessionaryfinancingforProgramme(UNDP)andtheWorldBank,aadaptationinvestmentprojects.PrivatecapitalplaysCPEIRcanhelpcountriesmainstreamclimateacrucialroleinfinancingadaptationandmitigationchangeintothebudgetingandplanningprocess.efforts,especiallyinemergingmarketsandTheCPEIRframeworklooksatthreekeypillars:developingeconomies.Whileprivatesustainable(i)apolicyanalysisthatreviewstheclimatechangefinanceinemergingmarketsanddevelopingpolicyframework,monitoring,andtherelationshipeconomiesrosetoarecord$250millionlastyearbetweenpolicyobjectivesandprograms/(Ehlersetal.2022),itmustmorethandoublebyinstruments;(ii)aninstitutionalanalysisofroles,2030tomeetParisAgreementgoals(Bhattacharyaresponsibilities,andcapacitiestoformulate,etal.2022).High-levelclimatepoliciessuchasimplement,andcoordinateclimateresponses;carbonpricingandcommitmentssuchasNDCsand(iii)aclimatepublicexpenditureanalysisthatsendastrongsignaltoinvestorstochannelquantifiesclimate-relevantpublicexpendituresfinancingformitigationandadaptationmeasuresandassessesfiscalpoliciesforclimatefinance(Ehlersetal.2022)Puttinginplacethefiscalrisk(UNDP2015).managementstrategiesdescribedabovealsoFindingsfromVanuatu’sCPEIRidentifiedPFMcapacityshortagesinauditandprocurementISSUE55•20249Box3:Kiribati’sClimateFinanceDivision—ACaseStudyKiribatiisasmallislanddevelopingstateinthecentralPacificwhoseexistencedependsonwhetherornotitcanmitigatetheeffectsofandadapttoclimatechange.Kiribati’sgeographicallocationexposesittoextremeweathereventssuchascyclones,stormsurges,andheavyrainfall,allofwhichareintensifiedbyclimatechange.CyclonesandstormsurgesposeasignificantthreattoKiribati’shousing,roads,andvitalutilities,with95%ofinfrastructurebuiltwithin500metersofthecoastline(Salleh2015).Increasedrainfallcausesfloodingandsubsequentdamagetocrops,freshwatersources,andsanitationsystems,posinghealthriskstothepopulation.Rebuildingandrecoveryeffortsfromtheseweathereventscanstrainthenationalbudgetanddivertresourcesfromessentialdevelopmentprojects,hamperinglong-termeconomicgrowth.Coastalfloodinganderosionendangertheagriculturesector,which,in2020,accountedforoveraquarterofKiribati’seconomy(Fiertz,Yozell,andRouleau2022).Majorcropsincludingcoconut,taro,andbreadfruitallrequiredrylandtogrowonandwouldbedecimatedbyacontinuationorintensificationofthecurrent3millimeterannualriseinsealevel(WorldBank2023).ClimatechangealsothreatensKiribati’sfishingandtourismindustries.Furthermore,theintrusionofsaltwaterthreatensKiribati’spotablewatersupply,alreadylimitedtoshallowpocketsofgroundwater.Kiribatilacksthefiscalresourcestofinancewaterharvestinginfrastructureandstrengtheningmechanismsforbroaderwaterresourcemanagement.Continuedsea-levelrisewillresultinthelossofhabitableland,increasedvulnerabilitytostormsurges,andthedisplacementofcommunities(ADB2022).Kiribati,whichcurrentlyaccountsforlessthan0.01%ofglobalemissions(RitchieandRoser2022),needstoinvestaggressivelyinadaptationmeasurestoprotectitspeopleandeconomy.Recognizingtheurgentneed,complexity,andvolumeofworkinvolvedinaccessingclimatefinanceforinvestmentsinadaptationprojects,in2016theGovernmentofKiribatiestablishedaClimateFinanceDivisionwithintheMinistryofFinanceandEconomicDevelopment(ADB2022).TheClimateFinanceDivision’smissionistocoordinateandinstitutionalizeclimatefinancingbyincreasingengagementwithclimatefunds,includingtheGreenClimateFund,theClimateInvestmentFund,theAdaptationFund,andtheGlobalEnvironmentalFacility,amongothers(GovernmentofKiribati2023).In2019,theGovernmentofKiribatifurtherstrengtheneditscommitmenttoprotectitselfagainsttheimpactsofclimatechangethroughthepassageoftheDisasterRiskManagementandClimateChangeAct,whichmandatesthe“mainstreamingandintegrationofclimatechangeanddisasterriskmanagementconsiderationsintheexecutionoftheirregularfunctions”forallgovernmentministries,agencies,andbodies.TheActalsostipulatesthatallgovernmentministries,agencies,andbodiesmusthave“plansandstandardoperatingproceduresinplacetoprotectstaff,equipmentandinfrastructureandtofacilitatecontinuedcapacitytofunctionfollowingdisasters”(GovernmentofKiribati2019).Sources:Fiertz,Yozell,andRouleau2022;WorldBank2023;ADB2022;RitchieandRoser2022;GovernmentofKiribati2023.practicesthatlimitedthecountry’sabilitytoaccessmobilizeresourcesformitigationandadaptationclimatefinancingliketheAdaptationFund;asameasures.Climatebudgettagging,whichcoversresult,theGovernmentofVanuatudevelopedancentralgovernmentrecurrentandinvestmentactionplanwithmeasurestoincreasebudgetbudgets,canalsobeextendedtolocalgovernmentsofNationalImplementingEntityaccreditationandSOEs(WorldBank2021c).Odisha,adisaster-(GovernmentofVanuatu2014).CPEIRscanalsopronecoastalstateineasternIndia,wastheanalyzetheadministrativeandpoliticalstructuresfirstsubnationalgovernmenttoapplyclimatethatenablepolicycoordinationandfiscaltransfersbudgettaggingwhenitundertookarigoroustofinancepolicyimplementationatthesubnationalcross-sectoralanalysistoinformits2020–2021level.InNepal,forexample,asubnationalCPEIRClimateBudget;throughthisprocess,Odishaidentifiedanumberoflessonslearnedtoincreasepubliclydiscloseditsbudgetaryneedstoaddresstheimpactofnationalclimateadaptationplans,climatechangeadaptationandmitigation(Climateincludingtheneedtoimprovecommunication,Group2021).TheUNCapitalDevelopmentsupportlocalgovernancereform,andbuildcapacityFund(UNCDF)performance-basedclimateatthesubnationallevel(UNDP2015).resiliencegrantprogramisanothertoolthatcanimprovetheprogrammingandverificationofClimatebudgettagging—agovernment-ledclimatechangeexpendituresatthelocallevelprocessofidentifying,measuring,andmonitoringbyprovidingcapacity-buildingandresourcestoclimate-relevantpublicexpenditures—isanothermakeinvestmentsclimate-resilient(UNCapitaltoolthatcanhelpgovernmentsintegrateclimateDevelopmentFund2023).changeintotheplanningandbudgetprocessand10TheGovernanceBriefBysystematicallytrackingclimatebudgetplansregradingpublicinvestmentplansinexpenditures,governmentscanincreaserenewablepowercapacity,electricvehicleandrailtransparencyandaccountability,identifyclimatenetworks,anditsnationalpolicytomaintaincurrentfinancinggaps,andsupportthemobilizationlevelsofforestcover.OtherC-PIMAshavehelpedofadditionalresourcesforclimatefinance.Forcountriesplanpublicinfrastructureinvestmentsexample,Indonesiausedrobustclimatebudgettoreducefloodrisk(e.g.,Croatia),coordinatetaggingasthefoundationfortheissuanceofstrategiesforrenewableenergydevelopmentandasovereigngreenbondandgreensukuk,theenergytransitionbetweenthenationalandlocalfirstcountrytodoso.Sincesovereigngreengovernments(e.g.,theNetherlands),anddevelopbondframeworksandclimatebudgettaggingguidanceonincorporatingclimateimpactsintomethodologiesbothrequireauthoritiestodefineprojectdevelopmentandappraisal(e.g.,theUnitedandsystematicallyreportoneligibleexpenditures,Kingdom)(IMF2021b).SeveralcountriesintheclimatebudgettaggingcanpositioncountriesAsiaandPacificregion—Cambodia,Georgia,tofinanceactivitieswithdefinedenvironmentalPakistan—andtheIndianstateofTamilNaduarebenefits(WorldBank2021c).finalizingorhaveveryrecentlycompletedC-PIMAsaswell.AndtheIMFrecentlylaunchedanonlineGovernmentscanalsotakestepstoefficientlytrainingcoursetargetingfinance,economy,andandeffectivelyplan,manage,andmonitorpublicplanningministryofficialsthatdescribeshowtheinvestmentsinlow-carbonandclimate-resilientC-PIMAtoolisappliedinpracticeandlinkagestoinfrastructure.CountriesoftenstruggletoaccessgreenPFMmorebroadly(IMF2023b).climatefinancebecausetheyfindithardtostrategicallyallocatepubliccapitalforclimateMorebroadlyspeaking,countriescanchangeandlackrobustandtangibleadaptationincorporateconsiderationofclimaterisksandinvestmentpipelines(Fouadetal.2021).ThisisopportunitiesintosystematicassessmentsandespeciallyimportantinmanycountriesinAsiaandreportingonthestrengthsandweaknessesoftheirthePacificthathavelimitedfiscalspace,wherePFMcapabilities.OnepracticalwaytodothisisgreenandresilientinfrastructureinvestmentbyemployingthePublicExpenditureandFinancialisamajorpartofcommitmentsundertheirAccountability(PEFA)Climateframework,asetNDCs.Andtherearemajorgainstobehadfromofsupplementaryindicatorsthat“buildsontheincreasedefficiency.Accordingtorecentresearch,PEFAframeworktocollectinformationontheinefficienciesinpublicinvestmentmanagementextenttowhichacountry’sPFMsystemisreadyinstitutionsintheregioncostcountriesalmosttosupportandfostertheimplementationofone-third(32%)ofresourcesspentonpublicgovernmentclimatechangepolicies,i.e.is‘climateinvestment(Baum,Mogues,andVerdier2020).responsive’”(PEFA2020,p.8).Morespecifically,thePEFAclimateframeworkhelpscountriesToimprovevalueformoneyandtheabilitybetterunderstandtheextenttowhichclimatetoattractprivatefinance,theIMFhasdevelopedchangeactivitiescanbeeffectivelyimplementedanewclimatemoduleforitsPublicInvestmentthroughthebudgetcycleunderexistingregulations,ManagementAssessment,ortheC-PIMAmodule.institutions,procedures,andprocesses.ThroughThisnewmoduleassessestheextenttowhichthisanalysis,itidentifiesgoodpracticesandareaspublicinvestmentmanagementinstitutionscriticalforimprovementandprovidesaccesstorelevantfordevelopingclimate-smartinfrastructurearetechnicaltoolkitsandimplementationguidance.preparedtomanagethesepublicinvestmentsandprovidespracticalpolicyandregulatoryreformstoSamoa,ahighlyindebtedandclimatechange-increaseefficiencies.C-PIMAshavefivecoreareasvulnerablePacificislandcountry,recentlypilotedofanalysis:climate-awareplanning,coordinationtheworld’sfirstPEFAClimateframeworkbetweenentities,appraisalandselectionof(IMF2021c).Thisexercise,whichidentifiedaprojects,budgetandportfoliomanagement,androbustplanningframeworkbutweaklinkagesriskmanagement(IMF2021b).C-PIMAfindingsbetweentheframeworkandresourceallocationcanbeespeciallyusefulforcountrieslookingtoforclimate-relatedactivities,hashelpedtheaccessclimatefundsthatcarefullyscrutinizepublicMinistryofFinanceidentifyopportunitiestoinvestmentmanagementpractices.improvethestrategicallocationofresourcesforclimatechangemitigationandadaptation.SomeSofar,theIMFhascarriedoutorisinthespecificandpracticablenextstepsthatcanhelptheprocessofconductingC-PIMAsin30countries.GovernmentofSamoabettermainstreamclimateNepalrecentlyutilizedaC-PIMAtostrengthenchangeintoitsbudgetprocessincludethefollowing:alignmentbetweenitsNDCandsectorinvestmentISSUE55•202411(i)examiningrevenuesourcesforpossibilitiesrequiregovernmentstospendpublicresourcestoadoptclimate-relatedresilience/riskonimmediate-termemergencyresponseandmitigationmeasures;reconstructioncosts.Thelossofproductiveassets,reducedproductivity,anddeclinesinincomefrom(ii)incorporatingclimatechangeresilienceacuteweathereventsandmedium-termclimatecharacteristicsintotheappraisal,selection,changeimpactscanleadtoinstabilityintheandprioritizationofpublicinvestments;financesector,whichcanforcegovernmentstoprovideregulatoryrelief.Publicspendingonclimate(iii)updatingthebudgetcirculartobeginchangemitigationandadaptationinvestmentsmainstreamingclimate-relatedexpenditureintoneededtoavoidworst-caseclimatescenariosandministryandagencybudgetsubmissions;andprotectlivelihoodswillplaceasignificantstrainonpublicfinances.Whentakentogether,thesefiscal(iv)trackingclimate-relatedexpenditurefromriskshavethepotentialtoimpactgovernments’budgettoexecutionforalloperational,sovereigndebtcreditworthinessandarealreadyprogrammatic,andinvestmentexpenditure.makingitmoreexpensiveforthecountriesthataremostvulnerabletoclimatechangetoborrow.TomitigatethefiscalrisksassociatedwiththeneedtospendonmitigationandadaptationThegoodnewsisthatgovernmentsinAsiameasures,governmentscanalsoidentifynewandthePacificaretakingwide-rangingmeasuresrevenuestreamsandcreatetheconditionstoattracttoproactivelyaddresstheserisks.Countriesaremoreprivatesectorandconcessionaryfinancing.analyzingtheimpactofclimatechangerisksontheirDitchingfossilfuelsubsidiescanfreeuppublicmacroeconomicframeworks,theirfinancesectors,resourcesandremoveaharmfuldisincentivetoandthesustainabilityoftheirpublicfinances,asreducingemissions.AndputtingapriceonGHGswellasthesuitabilityofdisasterriskfinancingisonewaythatcountriescan,collectively,reduceinstrumentsbasedontheireconomicconditions.emissions,promotemitigationopportunities,Governmentsareusingthefindingsfromtheseandgeneraterevenueforpublicinvestment.analysestobuildinfiscalbuffersthataccountforEnvironmentalleviessuchascarbontaxesareacost-theserisks,includingcontingentdisasterfinancing,effectiveapproachtogeneratingpredictablepublicdisasterinsurance,andcatastrophe-linkedbondsrevenueandnudgingproducersandconsumerstoforrelief,recovery,andreconstructionafterreduceGHGemissions.Emissionstradingsystemsdisasteroccurs.Manycountriesintheregionarecanalsohelpcountriesmeetemissionreductionalsoworkingtomitigatethefiscalrisksofclimatetargetsandraiseresourcestofinancepublicchangebyensuringthatstrategicplansandfiscalinvestments(Duggal2021).GovernmentsinAsiaframeworksalignwithclimatetargetsandobjectivesandthePacificcanearmarkrevenuegeneratedbyandstrengtheningPFMpracticesmorebroadly.carbonpricingandotherenvironmentaltaxestoWhentakentogether,thesestepsshoreuppublicrespondtoclimatechange-induceddisasters,easefinancesandsendastrongsignaltoprivateinvestorstheimpactofhigherpricesonpoorerhouseholds,lookingtofinanceclimatechangemitigationandandfinanceinvestmentsininfrastructureresilienceadaptationprojects.andnewtechnologies.Andthescopeforgrowthisimmense:asof2022,just23%oftotalglobalThemaintakeawaysfromthisgovernancebriefGHGemissionsweresubjecttoanycarbonpricingarethefollowing:instruments(WorldBank2022b).High-levelclimate(i)PolicymakersinAsiaandthePacifichavepoliciessuchascarbonpricingalsosendastrongsignaltoinvestorstochannelfinancingformitigationaccesstoabroadsuiteofanalyticaltoolsthatandadaptationmeasures(Ehlersetal.2022).AtooltheycanusetobetterassessthefiscalriskskitrecentlypublishedbyADBprovidesguidanceposedbyclimatechangeandtodevelopwaystopolicymakersonhowtoimplementcarbontomitigatetheserisks.pricingandfossilfuelsubsidyreductionmeasures(ii)Manycountriesintheregionalreadyhave(ADB2023f[CarbonPricingandFossilFuelSubsidyexperienceutilizingthesetoolsandareRationalizationToolKit.Manila.]).generatingimportantlessonslearnedthatothersconsideringusingthesetoolscouldConclusiontakeintoaccount.(iii)Thesetoolscanbetailoredtoeachcountry’sThefiscalrisksofclimatechangefacingcountriesownneedsandchallengesinmanagingtheinAsiaandthePacificrunthegamut.Climate-fiscalrisksofclimatechange.relatedweatherdisastersdepresstaxrevenuesand12TheGovernanceBriefClimateChange-RelatedQuestionsandPossibleAnswersQuestionHowtoTakeActionWhatistheimpactofclimatechangeonacountry’smacroeconomicIMF’sClimateMacroeconomicAssessmentframeworkandlong-termoutlook?HowmuchcouldamajordisasteraffectProgram(CMAP)(IMF2023a)thedebt-to-grossdomesticproductratio?Howsustainableareacountry’sfiscalpoliciesinthefaceofdisasters?WorldBank’sFiscalSustainabilityAnalysis(FSA)Howmuchcouldcontingencyfinancinglikecatastrophicriskinsurance(Schuleretal.2019)reducethenegativeimpactsofadisasterongrossdomesticproductanddebtlevels?Whatistheimpactofclimatechange-relatedshockstothefinancesector?IMF’sclimateriskanalysisembeddedinitsFinancialTowhatextentcouldincreasedphysicaland/ortransitionrisksaffectbankSectorAssessmentPrograms(FSAPs)(Adrianetal.capitalratios?2022)Howcangovernmentsbuildfiscalbufferstoaccountforclimatechange-Contingencylinesofcredit,disasterinsurance,relatedrisks?catastrophe-linkedbondsWhichdisasterriskfinancingtoolsaremostappropriateforacountry’sADB’scountrydiagnosticstoolkitforassessingtheeconomicconditions,theenablingenvironmentfordisasterriskfinancing,enablingenvironmentfordisasterriskfinancinganditsdisasterriskmanagementstrategy?(ADB2020b)HowcanacountrystrengthenitsgreenpublicfinancialmanagementUNDPandWorldBank’sClimatePublicpractices?Whataretheareasofpublicexpenditures,policies,andpublicExpenditureandInstitutionalReview(CPEIR)agencies’institutionalframeworksthatcouldbeadjustedtooptimizepublic(UNDP2015)andclimatebudgettagging(Worldresourcemanagementforclimatechange?Bank2021c)Howcangovernmentsmoreefficientlyandeffectivelyplan,manage,IMF’sclimatemoduleforitsPublicInvestmentandmonitorpublicinvestmentsinlow-carbonandclimate-resilientManagementAssessment(C-PIMA)(IMF2021b)infrastructure?HowcancountriesbetterincorporateconsiderationofclimaterisksandPublicExpenditureandFinancialAccountabilityopportunitiesintoassessmentsoftheirpublicfinancialmanagementcapabilities?(PEFA)Climateframework(PEFA2020)Sources:IMF2023a;Schuleretal.2019;Adrianetal.2022;ADB2020b;WorldBank2021c;IMF2021b;PEFA2020.ThetablepresentscommonquestionsAligishiev,Z.,E.Massetti,andM.Bellon.2022.aroundthefiscalrisksclimatechangemayposeMacro-FiscalImplicationsofAdaptationtoforcountriesinAsiaandthePacificandtoolsthatClimateChange.StaffClimateNote.No.2022/002.canhelppolicymakersobtainanswerstotheseWashington,DC:IMF.questionsandtakeaction.AsianDevelopmentBank(ADB).2018.ProposedReferencesLoanPhilippines:CityDisasterInsurancePoolProject.ProjectConceptPaper.Manila.Adrian,T.,etal.2022.ApproachestoClimateRisk———.2019a.TheEnablingEnvironmentforAnalysisinFSAPs.StaffClimateNote.DisasterRiskFinancinginFiji:CountryDiagnosticsNo.2022/005.Washington,DC:IMF.Assessment.Manila.Agarwala,M.,etal.2021.ClimateChangeandFiscal———.2019b.TheEnablingEnvironmentforDisasterSustainability:RisksandOpportunities.NationalRiskFinancinginSriLanka.CountryDiagnosticsInstituteEconomicReview.258(1).pp.28–46.Assessment.Manila.ISSUE55•202413———.2020a.ADBtoProvide$94MilliontoWashington,DC:InternationalMonetaryFund.BoostDisasterResilienceinPacific.Pressrelease.25November.Manila.ClimateGroup.2021.OdishaFormulatesa“ClimateBudget”,aFirstbyanIndianState.22March.———.2020b.AssessingtheEnablingEnvironmentforDisasterRiskFinancing:ACountryDiagnosticsDabla-Norris,E.,etal.2021.FiscalPoliciestoToolkit.Manila.AddressClimateChangeinAsiaandthePacific.DepartmentalPaper.No.2021/007.Washington,———.2022.FinancingResiliencetoMitigatetheDC:InternationalMonetaryFund.Pacific’sClimateVulnerability.PacificEconomicMonitor.August.Manila.Duggal,V.2021.CarbonPricing.ADBBackgroundNote.Manila.———.2023a.AsiaintheGlobalTransitiontoNetZero:AsianDevelopmentOutlook2023ThematicEhlers,T.etal.2022.HowtoScaleUpPrivateReport.Manila.ClimateFinanceinEmergingEconomies.Blog,7October.Washington,DC:IMF———2023b.ClimateResilientFiscalPlanning:AReviewofGlobalGoodPracticesManila.Ferrarini,B.,S.Dagli,andP.l.Mariano.2023.SovereignDebtVulnerabilitiesinAsiaandthe———.2023c.FindingBalance2023:BenchmarkingPacific.ADBEconomicsWorkingPaperSeries.PerformanceandBuildingClimateResilienceinPacificNo.680.Manila:AsianDevelopmentBank.State-OwnedEnterprises.Manila.Fiertz,N.,S.Yozell,andT.Rouleau.2022.———.2023d.KeyIndicatorsDatabase:Palau.CORVIRiskProfile:Tarawa,Kiribati.Resilience&Sustainability.4August.———.2023e.ImplementingNationallyDeterminedContributionsinAsiaandthePacific:Fouad,M.,etal.2021.UnlockingAccesstoClimateAnEvolvingRolefortheAsianDevelopmentBank.FinanceforPacificIslandCountries.DepartmentalWorkingPaper.Manila.Paper.No.2021/020.Washington,DC:InternationalMonetaryFund.———.2023f.CarbonPricingandFossilFuelSubsidyRationalizationToolKit.Manila.GovernmentofKiribati.2019.DisasterRiskManagementandClimateChangeAct.Baum,A.,T.Mogues,andG.Verdier.2020.GettingtheMostfromPublicInvestment.Washington,DC:———.2023.KiribatiCl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//www.adb.org/publications/corrigendaADBoritsBoardofGovernorsorthegovernmentstheyrepresent.https://www.adb.org/publications/series/governance-briefspubsmarketing@adb.orgADBdoesnotguaranteetheaccuracyofthedataincludedISBN978-92-9270-549-7(print)ISSN2520-6591(print)hereandacceptsnoresponsibilityforanyconsequenceoftheiruse.ISBN978-92-9270-550-3(electronic)ISSN2520-6605(electronic)PublicationStockNo.BRF230600DOI:http://dx.doi.org/10.22617/RF230600

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