Adaptation expenditure and public budget sustainability, the case of coastal protection
Francesco Bosello
Euro-Mediterranean Center on Climate Change, Lecce & University of Milan, Milan, Italy
This work analyses the economic implications of publicly planned adaptation to protect coastal zones against SLR. Input to the analysis are land, capital, and labour productivity losses as well as coastal protection costs elaborated from the DIVA model runs based on the combination of two SSPs (2 and 5), three RCPs (2.6, 4.5, and 8.5), two GCMs (NorESM and MIROC-ESM) and accounting also for land-based ice melt uncertainty (low, medium, and high). The economy-wide assessment is conducted with ICES-XPS, a multi-sector and multi-region CGE model enhanced with a detailed description of the public sector. Planned adaptation against SLR takes the form of public investments and expenditures for maintenance addressing the building sector. This expenditure is funded by issuing government bonds.
In a scenario where there is no additional adaptation, all world regions suffer a GDP loss. The most damaged countries are in Asia. When coastal protection takes place, the highest GDP gains compared to the case of no protection are observed mostly in Asian countries where SLR impacts are markedly high and adaptation expenditures particularly effective. In the remaining regions GDP gains are also experienced. The beneficial effect of adaptation on GDP is the result of two mechanisms. The first one regards the avoided direct impacts (i.e. loss of labour productivity, land, and capital). The second one is the public deficit effect. When adaptation to SLR reduces GDP losses, it also triggers a tax interaction effect which produces higher tax revenues for most regions, and also lower public expenditures for Asian countries. Therefore, with lower deficits governments borrow less from households’ and pay a lower debt service both of which allows for an increased capital accumulation and growth in the long run. This result is particularly interesting as the improvement in public finance sustainability is one of the elements that contribute to increase savings, investments and eventually growth after adaptation has taken place.
As a general conclusion and policy recommendation, support to adaptation in deficit spending might be not necessarily bad for GDP growth, and might also trigger positive effects on public finance sustainability. This highlights a potentially interesting policy outcome. Adaptation expenditure could enable virtuous processes even though initially financed with debt. This can be a good new for countries where increasing tax pressures is particularly problematic. This raises the issue of the different results that could be obtained through, for instance, earmarked taxation for adaptation that can potentially trigger different dynamics on debt accumulation and thus on the consumption-investment balance and growth. This will be a topic for future analysis.