Does fighting climate change put the economy at risk?

Climate change is a threat to countries' macroeconomic and fiscal stability. Extreme weather events exacerbated by global warming alone are costing the world $143 billion every year. However, measures to mitigate and adapt to climate change can also pose a risk to fiscal stability, especially for emerging and low-income developing countries, whose limited public spending capacity also makes them more vulnerable to extreme events. But how are climate and fiscal risks related, and above all, how can they be mitigated?

A study led by Jorge Mario Uribe, the coordinator of the Finance, Macroeconomics and Management (FM2) research group and a member of the Faculty of Economics and Business at the Universitat Oberta de Catalunya (UOC), and co-authored by Helena Chuliá, a researcher at the University of Barcelona, focuses on this complex relationship, and examines how fiscal crisis risks and climate change can compound each other.

"The study shows that fiscal and climate risks are closely related to each other, and are heightened by factors related to countries' institutional quality. It's a mistake to think of them as separate risks, and this could lead us to underestimate them," said Uribe. "This is crucial in the current context, as we need international coordination to ensure that the limited fiscal capacity of the most vulnerable countries does not lead to an overall retreat in the fight against the effects of climate change."

Climate change, public finances and institutional quality

In search of answers, the paper, which has been published as open access in the European Journal of Political Economy, examines the relationship between investment in adapting to climate change and the need for countries to maintain fiscal stability, avoiding debt crises and budget strain. The core question raised by the study is whether investment in adaptation increases the risk of fiscal crises, or whether the two objectives can be pursued simultaneously. In their analysis, the authors studied data from 172 countries between 1995 and 2020, combining indicators of climate vulnerability, preparedness for extreme events, institutional quality and public debt, among others.

One of the study's most important findings is that adapting to climate change does not necessarily destabilize public finances. In other words, there is no structural conflict between the two goals. However, certain conditions must be met if investment in adaptation measures is not to affect fiscal stability. "Institutional quality is a decisive factor in both fiscal stability and preparedness for climate change," explained Uribe, a researcher affiliated to the Digital Transformation and Governance Research Centre (UOC-DIGIT). Factors related to governance and institutional quality, such as control of corruption, political stability, regulatory quality and government effectiveness, are therefore crucial.

The problem is interest rather than debt

Another interesting finding of the study is that the level of public debt in countries does not in itself explain the relationship between fiscal risks and adaptation to climate change, rather the most important factor is in fact interest costs. In other words, the issue is not how much countries owe, but rather how much financing costs them. This means that it is more important that institutions contribute to keeping debt interest rates low if they are to be able to make the investments they need for the ecological transition.

"The traditional idea that there are no funds available for investment in the infrastructure and protection needed for climate adaptation when there is limited fiscal room for manoeuvre is true," Uribe pointed out. "However, our study goes further, by showing that this relationship is mediated by institutions, and that the debt burden – in other words, the interest paid on debt – is a more decisive factor than the overall debt. This creates a window of opportunity for action, since it is theoretically possible to put an end to the downward spiral in which higher levels of debt lead to a more limited capacity to adapt to climate change. Cutting interest rates is the way to end this vicious cycle."

"Interest payments are becoming unsustainable for many countries at current levels of debt. The costs associated with adapting to and mitigating the effects of climate change will make the situation worse. If the world does not want to see a chaotic series of defaults, how we structure payments and the interest on the debt must take this into account," said Uribe.

Climate adaptation also helps fiscal stability

Adaptation to climate change covers an extensive range of solutions and measures. The study also points out that not all measures have the same effect on countries' fiscal stability and that in fact, some actions reduce vulnerability while also making countries' public finances more robust. The study highlights the importance of measures aimed at improving the human habitat, which consists of the factors that provide the population with shelter, protection and comfort.

Measures focused on managing demographic challenges (such as population ageing and urban concentration), improving the quality of transport and trade, reinforcing communication and health infrastructure, and having the tools to prevent and take quick action against extreme weather events (such as floods) are therefore essential. The study concludes that improving the human habitat not only boosts countries' development, but also reduces their likelihood of experiencing a fiscal crisis.

Institutional quality and alleviating the debt burden are once again important in this respect. "Governments and international institutions must prioritize countries' macroeconomic stability and support ongoing institutional improvement, including strengthening international financial safety nets and multilateralism, which are both under constant attack in the current geopolitical landscape," said Uribe.

The study aligns with the UOC's Digital transition and sustainability research mission and contributes to UN Sustainable Development Goals (SDGs) 11, Sustainable Cities and Communities; 13, Climate Action; and 16, Peace, Justice and Strong Institutions.

Reference article

Jorge M. Uribe and Helena Chuliá, Assessing the joint risks of fiscal crises and climate change, European Journal of Political Economy, Volume 91, 2026, 102784, ISSN 0176-2680: https://doi.org/10.1016/j.ejpoleco.2025.102784

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