Climate change: macro-fiscal risks and challenges

The response to climate change will demand profound transformations in social and economic systems, requiring significant investments from both the public budget and the private sector. This occasional paper contextualizes the issue of climate change in the Portuguese economy and analyses its effects on public finances. This document explains the main concepts underlying climate change and analyses the main theoretical transmission channels to the economy. The empirical evidence for Portugal regarding this issue is reviewed and the policies and financial instruments already adopted in the country to ensure the decarbonization of the economy until 2050 are surveyed. A detailed analysis of the financial dimension of the climate action for Portugal is presented, aiming to clarify the financing strategy of the country to reach carbon neutrality and the allocation of the financial effort to be executed between the public and the private sectors. This study concludes that, in Portugal, despite the approval of several climate action plans, there is a clear need for better articulation between the multiple instruments and to develop their financial dimension in order to ensure greater transparency of the inherent processes and to secure the achievement of the agreed targets. The impact of climate change over the economic growth and other dimensions of the society will be greater the less action taken by policy makers to adopt mitigation and adaptation measures that fulfil the goals of the Paris Agreement.