Economic Principles for Integrating Adaptation to Climate Change into Fiscal Policy

This Staff Climate Note is part of a series of three Notes (IMF Staff Climate Note 2022/001, 2022/002, and 2022/003) that discuss fiscal policies for climate change adaptation. This first Note examines the economic principles that can guide the integration of climate change adaptation into fiscal policy. A second Note (Aligishiev, Bellon, and Massetti 2022, henceforth Note 2) discusses the macro-fiscal implications of climate change adaptation. It reviews evidence on the effectiveness of adaptation at reducing climate change damages, on residual risks, and on adaptation investment needs, and suggests ways to integrate climate risks and adaptation costs into national macro-fiscal frameworks. It stresses that lower-income vulnerable countries, which have typically not contributed much to climate change, face exacerbated challenges that warrant increased international support. A third Note (Bellon and Massetti 2022, henceforth Note 3) considers how to translate adaptation principles and estimates of climate impacts into effective policies. It argues that, for all countries, adaptation solutions can be guided by an extension of the IMF (2019a) three-pillar disaster resilience strategy to address changes in both extreme and average weather. It suggests that governments can support an efficient implementation of adaptation solutions by factoring climate risks and adaptation plans into budgets, macro-frameworks, and, in the management of public investment, assets and liabilities. Policymakers challenge of facilitating this transition. This Note argues that adaptation to climate change should be part of a holistic development strategy involving both private and public sector responses. Governments can prioritize public investment in adaptation programs with positive externalities, address imperfections and that private inefficient, and mobilize the be and complemented