Fiscal implications of public climate change adaptation: An analysis of three European countries

While effective adaptation reduces climate change impacts, its fiscal consequences remain insufficiently understood. To fill this gap, this study assesses how public adaptation - through its costs and its interaction with climate impacts - affects macroeconomic outcomes and fiscal space in Spain, Austria, and the Netherlands. Using a computable general equilibrium model, we implement multiple climate impact channels and evaluate country-specific adaptation portfolios, financed either through reallocating existing government expenditure or issuing domestic government bonds, under a range of climate scenarios by mid-century. For expected annual climate impacts, we find positive macroeconomic and fiscal effects in Spain and Austria, relative to a scenario without additional adaptation. In the Netherlands, by contrast, the high cost of comprehensive flood protection reduces fiscal space. However, this result reverses in the case of a high-damage year, represented by a 1/500-year flood event: in such situations, large-scale adaptation substantially shields economic activity and the government budget. Results are robust across climate scenarios, adaptation effectiveness ranges and financing schemes. Differences between financing schemes are moderate in aggregate terms, but entail trade-offs between government and private consumption. Overall, the findings highlight that public adaptation - despite constituting an additional fiscal commitment - can enhance economic activity and preserve fiscal space as climate risks intensify.