December 9, 2021
Read time : 13 min

How does climate change relate to fiscal sustainability?

Climate change effects will be a critical factor in the future of America's financial markets. For example, they will affect the creation of new and the ending of old businesses. They will also be important fiscally as they support additional tax revenues and increased demand for government services. In both cases, the changes brought about by climate change and the impact of global warming will remake our world.

America is already on an unsustainable fiscal path, only worsened by spending arising out of the COVID pandemic. Young people are finishing college at record rates, but jobs are stagnant in an economy that offers them little. Climate change, which for better or worse, will transform the world of work, will be an important factor in changing this status. Ignoring the negative effect of global warming is simply no longer an option. It's up to young leaders like yourself to pay attention and engage with government to foster change.

Climate change factors that affect fiscal sustainability

When it comes to fiscal sustainability, government plays a big role. Climate change is likely to make huge demands on the fiscal sustainability of all governments in the near future. As they respond to the growing effects of climate change, governments will be hard-pressed to maintain public finances and services at expected levels over the long term. Responsible governments dealing with the crises that arise from global warming will have to find ways to minimize climate change effects on the environment. While doing that, they must still be able to provide services and respond to crises. The following issues must be considered as they develop plans to meet those goals:

1. Greenhouse gas emissions

Greenhouse gas (GHG) emissions continue to grow at a rapid pace. Preliminary data from 2020 says that global atmospheric CO2in 2020was 412.5 parts per million (ppm), setting a new record high. This new high occurred despite the huge decrease in economic activity due to the pandemic.


2. Environmental impact of GHG emissions

Those record greenhouse gas emissions are even now impacting the world's economies in various ways. Ocean acidification, for instance, damages important food sources. It is also adversely impacting coral reefs. The shrinkage in reefs worldwide greatly increases the impact of tropical storms. The resulting bigger hurricanes are one of the most visible and expensive economic impacts of today's climate change.

3. Climate change mitigation policies and their economic effects

The mitigation policies being considered today are more economically based than those of the past. For example, tradable emission permits, first considered in the 1990s, are again at the forefront of greenhouse gas emission control. This program sets an allowable emissions target and then allocates emissions among market participants. It provides a market for the purchase and sale of emission allowances. In programs like these, companies that improve their emissions performance can profit by selling their emissions. However, those who do not lower their emissions will have to pay for their contributions to climate change effects by purchasing additional allowances in the marketplace.

4. Relationship between economic and fiscal effects of climate change

Besides shaping fiscal policy, climate change affects the economy directly in many ways. It brings new kinds of businesses to the marketplace that produce products perhaps never heard of or needed before, but now essential. Some that have become part of everyday life are long-lasting LED lightbulbs and smart thermostats, both of which create easy and passive energy use reductions. Energy conservation companies and clean transportation will need engineers and innovators to continue to develop responses to climate change.

On the other hand, climate change effects also drive away businesses that can no longer function in the new climate. It is clear that the market today, for example, is favoring businesses that depend on or use non-fossil fuels; fossil fuel companies will need to respond. As the nature of the economy and its participants continues to change, tax revenues will flow from new sources, like emission taxes, and be spent on clean energy and climate change projects, such as more efficient uses of non-fossil fuels.


How are taxes, subsidies and public revenue affected by climate change?

Its effects are extensive in the present, but climate change will also impact future government spending and revenues in several important ways. In essence, the government can and is using fiscal policies to fight climate change. First, the government can use taxation to influence behavior. Higher taxes on fossil fuels can reduce consumption. Clean energy installations and equipment are and can be further tax-advantaged.

Government can also focus its spending in ways that limit or moderate climate change. It can, for example, require all government vehicles to run on sustainable fuels. Further, the government can force companies to disclose their climate change policies and activities to the marketplace. As another example, the Securities and Exchange Commission recently created an enforcement task force focused on climate and ESG issues. Using its financial disclosure authority, the SEC is working to force emissions limits.


Public expenditures and benefits of fighting climate change

By spending money on climate change projects and infrastructure, governments change the economy and the fiscal policies that arise from it. If we have an economy in which fossil fuels are no longer a significant energy source, the government will change its subsidies. It will no longer encourage fossil fuel exploration and exploitation. In the meantime, industries that can bring sustainability to the economy will also bring fiscal sustainability to the government. Jobs in new climate-change-mitigating industries will attract the best and brightest, escalating the development of sustainable climate change. Taking these steps now is a start toward ensuring fiscal sustainability for the next generation.

Short-term fiscal risks of climate change effects

Short-term fiscal risks of climate change arise primarily from governments' need to manage and respond to the current crisis. Crop-growing regions are changing, and storm patterns, a new feature of climate variability, are becoming more destructive and frequent. At the same time, fossil-fuel industries are starting to disappear.

In response, governments will be focused on responding to those changes. They cannot do that while creating new climate change programs. Remodeling crop support programs and helping to relieve the suffering of those caught by historically destructive storms will take government assets away from long-term programs for handling climate change. While money is fungible, spending is not. A dollar spent rebuilding after yet another hurricane-of-the-century is one that cannot be spent in support of alternative energy. In the short term, the government's lack of fiscal choice may be the biggest risk of climate change.

Long-term fiscal risks of climate change effects

Long-term risks to financial stability arising from climate change are no less difficult to handle than short-term risks. As the economy transitions away from fossil fuels, jobs and entire industries will be disrupted and lost. The individuals previously employed in and by those disappearing industries will require significant government assistance to retrain and rebuild their lives. Once again, the fiscal risk is the lack of government freedom to make choices in its responses to climate change. It will instead be forced to engage in fiscal crisis management before it can even think about new economic benefits of challenging climate change.

Using fiscal policies to fight climate change

As mentioned above, the government can actually use its fiscal powers and policies to fight climate change. Currently, various levels of government actually collect some 10% of the fossil fuel revenues generated in the United States. By instead subsidizing the development of non-fossil fuel industries, the government can speed their development, but would need to replace the oil revenues. It has already begun this transformation, for example, by supporting the development of hybrid and electric cars. At the moment, there are current activations to limit federal involvement in fossil fuel production, thus incentivizing alternative fuels. By imposing tax or other extraordinary obligations on businesses that contribute to climate change or global warming as certain pending bills would do, the government will participate in moving them off the economic stage. By incentivizing the business it wants and disincentivizing those it doesn't, the government participates in leading the economy in the direction that best suits its fiscal goals.


Ensuring fiscal sustainability for the next generation

The government cannot, however, simply stand by and wait and watch for climate change effects to slow. Instead, there is a call to work for fiscal sustainability by engaging in a constant forecasting project. Critical issues such as future revenues and liabilities must remain on the government's fiscal radar. Ongoing changes to the environment and changing social and economic trends must also remain a focus of governmental attention. By maintaining this focus, the government can consciously use fiscal and economic policy to encourage positive climate change that the government seeks and the world needs.


To learn more about how you can help focus America's fiscal and economic policies on ending climate change, consider getting involved with Up to Us. Young people across America are becoming educated about fiscal policy and helping to mitigate climate change effects. Sign the pledge to let your government know you are concerned about the country’s fiscal future, or get involved by learning about how you can make a difference in your own community.