How does climate change adaptation affect public budgets? Development of an assessment framework and a demonstration for Austria

Abstract

Public adaptation to climate change affects government budgets directly on the expenditure side, but also indirectly via changes in the tax base and government consumption patterns. While such indirect effects have been analyzed intensively for mitigation policies, similarly detailed model-based frameworks and studies for adaptation policy are still missing. The objectives of the present paper are (i) to fill this gap by proposing a general modeling framework that allows for a comprehensive analysis of effects of adaptation on federal budgets, both on the expenditure and the revenue side, as well as of macroeconomic effects and (ii) to demonstrate its usefulness by applying this framework to the case of Austria. We find that public adaptation can lead to substantial positive macroeconomic effects on gross domestic product (GDP), welfare, and employment. The results are robust with respect to assumptions about the effectiveness of adaptation. Also, we demonstrate that it is essential for analysis to cover both the expenditure and revenue side, as overall government revenues can increase due to adaptation, offsetting additional direct public expenses for adaptation, thus increasing the budget balance. This is because of less severe climate change impacts and the corresponding lower payments for post-disaster relief and unemployment benefits as well as higher tax revenues. We thus strongly recommend making use of economy-wide modeling frameworks when planning for adaptation, as they shed light on the true costs and benefits of adaptation.