Macroeconomic and Fiscal Consequences of Climate Change in Latin America and the Caribbean

Climate change poses a significant challenge for Latin America and the Caribbean, exposing its vulnerabilities to hydrometeorological shifts and rising temperatures that threaten economic stability. We examine the macroeconomic consequences of climate change through the lens of six distinctive country cases. Our results suggest that compensating for the drag on economic growth caused by climate change would require public and private investments of 5.3 % of GDP to 10.9 % of GDP per year. Faced with existing fiscal constraints and restrictive financial conditions, we explore the macrofiscal implications of an investment push in line with the Nationally Determined Contributions (NDCs). Our results suggest that front-loaded public adaptation investments would improve growth over the medium term, although not fully compensating for climate losses. However, resulting public debt trajectories would become untenable in most countries. We find that a key factor for a fiscally sustainable NDC investment push is the financial costs that countries face when issuing sovereign debt. Debt sustainability could be significantly improved if countries could finance their climate investments at lower cost or concessional terms.