Looking at Climate Change in a fiscal context

Climate change and its related risks to the economy was noted as an issue in the 2017 Office for Budget Responsibility (OBR) fiscal risks report but not analysed in depth. The recent OBR fiscal report published July 2019 is the first to look at some of the fiscal challenges that climate change may likely have on the UK’s finances.

Climate change fiscal risks could present both sudden shocks and slower-building pressures on the public finances, but do not appear especially large, relative to others issues that the OBR is currently looking at.

However, with rising UK and global temperatures the OBR have identified an increase in the risk of both heatwaves and severe flooding. The scale of the risks associated with climate change will depend hugely on the extent to which global temperatures continue to rise. Over the past two years, the Bank of England has continued developing its approach to assessing climate-related risks to financial stability.

As the OBR fiscal report must only analyse current policies in place by the government, the approach in this review is more to illustrate the risks associated with projected climate trends within current policies rather than consider the merits of the policy options available.

The report looks at:

  • The Bank of England’s framework for the analysis of climate-related risk to financial stability both physical and transition:
    • Fiscal risks from extreme weather, depend upon on how extreme the event is.
    • Fiscal risks from adaptation to climate change subject to considerable uncertainty.
    • Fiscal risks from the transition to a low-carbon economy, the extent of which will be guided by the degree of emissions reductions.
  • Climate-related fiscal risks to the economy and the relative scale of them:
    • Conventional medium-term forecast risks include unexpected costs that raise spending relative to plans or shocks that cause revenues to fall short of forecast.
    • Risks to fiscal sustainability, where resources are redirects to manage impacts of climate change, and any direct pressures placed on tax revenue and public spending.
  • Next steps to take in collaboration with institutions:
    • Engage with the Bank of England analysts as they consider possible financial stress testing scenarios.
    • Proposed working with the OECD and the Network for Greening the Financial System (NGFS) on scenario workstreams to draw on global experiences.

The climate change related chapter of this OBR fiscal report poses key questions for the government to consider when assessing the outlook for the economy and public finances over the medium and long term.

Find out more on how ADS and aerospace are responding to the climate change challenge in our newsroom.