How public adaptation to climate change affects the government budget: A model-based analysis for Austria in 2050

Public adaptation to climate change affects government budgets directly on the expenditure side, but budgets are also indirectly affected via a change in the tax base and a diversion of government consumption. While these indirect effects have been analyzed intensively for mitigation policies, a similarly detailed model-based analysis for adaptation policy is still missing. The present paper addresses this gap for the case of Austria in 2050 by (i) developing an adaptation expenditure pathway starting from current adaptation-relevant expenditures on programs and measures; (ii) analyzing the macroeconomic consequences thereof in a computable general equilibrium model; and (iii) assessing both direct and indirect effects on government revenues and expenditures. We find that public adaptation can lead to substantial positive macroeconomic effects on gross domestic product, welfare, and employment and that this effect is robust with respect to different assumptions on the effectiveness of adaptation measures. Despite the additional direct public expenses for adaptation, the overall government revenues, and therefore the budget balance, increase (relative to a climate change impact scenario without adaptation). These higher revenues trace back to reduced tax losses from less severe climate change impacts as well as higher labor tax revenues since soft and green adaptation measures stimulate employment. On the expenditure side, less expenditures on disaster relief and unemployment benefits enable increasing government consumption in other areas like health and education.