"Climate change is expected to have significant macroeconomic and fiscal impacts," and meeting the Paris Agreement target of keeping global warming to 1.5°C will be "essential" to contain inevitable economic losses, the European Commission said today in its fiscal sustainability report for 2021.
The European Commission found that there was an overall fiscal impact of between 0.3pc and 1.1pc of GDP from natural disasters, including climate-related disasters, in the US and the EU.
Aggregate losses in southern Europe are expected to be several times larger than those in northern Europe, the commission said. Although the list is not exhaustive, impacts from climate-related events include "shocks to the supply and demand side of the economy," as well as damage to infrastructure and property, reduced labour productivity, lower consumption and investment and disruption to global trade flows, according to the report.
The report laid out three projected pathways to the end of this century to compare the economic hit across EU member states. Under the 1.5°C warming scenario, the biggest economic losses will be due to flooding in most EU member states, apart from Mediterranean countries — Portugal, Spain, Italy, Malta, Cyprus, Greece, Croatia and Slovenia — for which drought will cause the biggest financial losses, commission data show.
Under the 2°C and 3°C warming scenarios, coastal flooding is projected to cause the heaviest losses by far in all EU countries, with costs from coastal flooding alone expected to total around €200bn ($214bn) in the worst-case scenario, according to the commission's report. But even these losses do not take all possible consequences from a climate-related natural disaster into account, meaning estimates are on the lower side, the report warned.
Flooding increased in central and eastern Europe between 2000-2020, while wildfires are the main cause of concern — representing around 80pc of disasters — in southern Europe, commission data show. The latest report from the Intergovernmental Panel on Climate Change showed that policies implemented by the end of 2020 would lead to global warming of between 2.2-3.5°C by the end of the century.
Economic losses from natural disasters are projected to increase between two-to-threefold in the EU by mid-century, from a baseline of 1981-2010. And the factor increase jumps rapidly by the end of the century under commission predictions, dependent on warming scenarios of 1.5°C, 2°C and 3°C. The best-case scenario shows an EU average of a three-fold increase in economic losses and the worst-case a factor increase of 15 on average across EU member states.
Extreme weather and climate events are more likely to affect short- and medium-term finances, while in the medium- and long-term, "permanent damage" may arise from what the commission terms chronic physical risks — which "reflect more gradual, and often irreversible, transformations of the environment due to global warming."
There will be "economic and fiscal consequences stemming from the transition to a low-carbon economy," the commission said, although it noted the longer-term benefits of increased investment in decarbonisation. Investment required across the EU for the green transition is estimated at around €520bn/yr to 2030, the commission said. The EU needs to spend an additional €390bn/yr between 2021-2030 on energy systems, relative to 2011-2020, if it is to reach its 55pc emissions reduction target by 2030, from a 1990 baseline.
The commission pointed to the need for "well-designed climate risk insurance policies" to help manage the economic impact of climate disasters. Southern and eastern European countries are most exposed to uninsured economic losses from climate-related disasters, reaching 7.5pc of GDP in Spain and 5pc in Romania.
