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Building Financial Resilience to Climate Impacts
A Framework to Manage the Risks of Losses and Damages
Andrew Blazey, Stéphane Jacobzone and Titouan Chassagne
Public Management and Budgeting
9th Meeting of the OECD Paris Collaborative on Green Budgeting
18 April 2023
2
OECD Framework to Build Financial Resilience to Climate Impacts
> Developed across three OECD directorates (the Public Governance Directorate, the
Environment Directorate, and Directorate for Financial and Enterprise Affairs)
> Provides a strategic framework to help governments strengthen capacity to manage the
budgetary implications of climate-related risk
> Takes into account fiscal constraints across countries, including in emerging market and
developing economies
Strengthening
financial
management of
climate risks
1. Identify and assess
climate risks and
financial implications
for governments
2. Mitigate financial
losses from climate
risks
3. Prepare coherent
and multipronged
government financial
strategies
Framework to manage the risks of losses and damages
3
Assessing climate-related fiscal risks
> Post-disaster costs faced by central governments include:
> Immediate response to the needs of those impacted
> Supporting recovery and reconstruction, including losses and damages incurred by central government entities
> And potentially, losses and damages incurred by subnational governments, households and businesses
Identifying and assessing climate-related risks,
financial vulnerabilities, and budgetary implications
for governments
Reporting climate-related fiscal risks to promote
transparency in public financial management
Identify and assess climate-related risks
• Fiscal risk assessments can be done by governments
directly, or by independent fiscal institutions, e.g. fiscal
councils
• There is a need to distinguish between explicit and implicit
contingent liabilities (which will depend on cost-sharing
arrangements)
• Disclosure can ensure accountability and generate continued
pressure on governments to identify, quantify and plan for
climate-related risks
• Strategies to manage climate-related risks can be integrated
in the budget process (e.g. Fiscal Risks Reports as an annex
of the Budget law)
4
Mitigation: governance tools and balance sheet measures
Invest in risk reduction
/ adaptation
Support insurance
coverage
Ensure clarity in
financial assistance
arrangements
Align incentives across
levels of government
Mitigate impacts
• Promote climate change
adaptation initiatives,
including through zoning,
building codes
• Use balance sheet
measures to address the
availability of affordable
insurance (e.g.
catastrophe risk insurance
programmes,
government-backed re-
insurance pools)
• Ensure the availability of
basic compensation and
post-disaster financing to
reduce economic/social
hardship
• Provide clarity on scope,
level of support, eligibility
and ceiling for financial
assistance
• Promote cost-sharing
mechanisms across levels
of government to mitigate
moral hazard
• Define conditions for
reimbursement and
ceilings on financial
assistance
• Support subnational
governments in identifying
measures to reduce
residual risk and cost
5
Implications for budgets and public financial management
> Once fiscal risks are assessed and mitigated, there is a
need to identify how to fund response, relief and
recovery costs
> This can require rapid and significant adjustments to
the level and composition of government revenue and
expenditure
> A government’s optimal post-disaster response depends
on the type of hazard and the magnitude of economic
disruption
> Budgetary tools are most suited to retain risk from
frequent events that cause relatively small economic
disruption
6
Funding climate-related risks: Budgetary tools
> As a starting point, governments need to asses their capacity to absorb losses within their budgetary and fiscal
framework
> Not all governments can leverage budgetary tools to the same extent, depending on rigidities in the budget and
competing priorities
Budget reallocations
(immediate post-disaster response)
Contingency reserves
(high frequency and low-severity events)
Reserve funds
(high severity and low-frequency events)
Budgetary tools for risk financing
• Allows for the rapid reallocation of funds
to cover immediate post-disaster funding
needs
• To absorb high-frequency and low-severity
climate-related events (e.g. localised
floods and droughts) and cover immediate
disaster relief and response needs
• For relatively high-severity and low-
frequency climate disasters
7
Key implications of this work
> The risks of losses and damages from climate change will continue to increase
> Unless action is taken, there could be a disproportionate burden on central governments
> Governments therefore need to develop multi-pronged financial strategies to manage climate-related risks
> Strategies should consider fiscal constraints, the amount of funding needed and when it’s needed
> Because public finances are under significant stress, government should weigh the costs and benefits of different
approaches
> The opportunity costs of alternative uses of the funds as well as the potential benefits of investing further in risk
reduction and adaptation
> A combination of financial and budgetary tools can apply to transfer, finance, and retain risk
> The mix will depend on a country-specific circumstances and budget constraints
> The OECD framework can help governments strike the right balance
8
Thank You
9
Annex: Funding climate-related risks – which budgetary tools?

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  • 1. Building Financial Resilience to Climate Impacts A Framework to Manage the Risks of Losses and Damages Andrew Blazey, Stéphane Jacobzone and Titouan Chassagne Public Management and Budgeting 9th Meeting of the OECD Paris Collaborative on Green Budgeting 18 April 2023
  • 2. 2 OECD Framework to Build Financial Resilience to Climate Impacts > Developed across three OECD directorates (the Public Governance Directorate, the Environment Directorate, and Directorate for Financial and Enterprise Affairs) > Provides a strategic framework to help governments strengthen capacity to manage the budgetary implications of climate-related risk > Takes into account fiscal constraints across countries, including in emerging market and developing economies Strengthening financial management of climate risks 1. Identify and assess climate risks and financial implications for governments 2. Mitigate financial losses from climate risks 3. Prepare coherent and multipronged government financial strategies Framework to manage the risks of losses and damages
  • 3. 3 Assessing climate-related fiscal risks > Post-disaster costs faced by central governments include: > Immediate response to the needs of those impacted > Supporting recovery and reconstruction, including losses and damages incurred by central government entities > And potentially, losses and damages incurred by subnational governments, households and businesses Identifying and assessing climate-related risks, financial vulnerabilities, and budgetary implications for governments Reporting climate-related fiscal risks to promote transparency in public financial management Identify and assess climate-related risks • Fiscal risk assessments can be done by governments directly, or by independent fiscal institutions, e.g. fiscal councils • There is a need to distinguish between explicit and implicit contingent liabilities (which will depend on cost-sharing arrangements) • Disclosure can ensure accountability and generate continued pressure on governments to identify, quantify and plan for climate-related risks • Strategies to manage climate-related risks can be integrated in the budget process (e.g. Fiscal Risks Reports as an annex of the Budget law)
  • 4. 4 Mitigation: governance tools and balance sheet measures Invest in risk reduction / adaptation Support insurance coverage Ensure clarity in financial assistance arrangements Align incentives across levels of government Mitigate impacts • Promote climate change adaptation initiatives, including through zoning, building codes • Use balance sheet measures to address the availability of affordable insurance (e.g. catastrophe risk insurance programmes, government-backed re- insurance pools) • Ensure the availability of basic compensation and post-disaster financing to reduce economic/social hardship • Provide clarity on scope, level of support, eligibility and ceiling for financial assistance • Promote cost-sharing mechanisms across levels of government to mitigate moral hazard • Define conditions for reimbursement and ceilings on financial assistance • Support subnational governments in identifying measures to reduce residual risk and cost
  • 5. 5 Implications for budgets and public financial management > Once fiscal risks are assessed and mitigated, there is a need to identify how to fund response, relief and recovery costs > This can require rapid and significant adjustments to the level and composition of government revenue and expenditure > A government’s optimal post-disaster response depends on the type of hazard and the magnitude of economic disruption > Budgetary tools are most suited to retain risk from frequent events that cause relatively small economic disruption
  • 6. 6 Funding climate-related risks: Budgetary tools > As a starting point, governments need to asses their capacity to absorb losses within their budgetary and fiscal framework > Not all governments can leverage budgetary tools to the same extent, depending on rigidities in the budget and competing priorities Budget reallocations (immediate post-disaster response) Contingency reserves (high frequency and low-severity events) Reserve funds (high severity and low-frequency events) Budgetary tools for risk financing • Allows for the rapid reallocation of funds to cover immediate post-disaster funding needs • To absorb high-frequency and low-severity climate-related events (e.g. localised floods and droughts) and cover immediate disaster relief and response needs • For relatively high-severity and low- frequency climate disasters
  • 7. 7 Key implications of this work > The risks of losses and damages from climate change will continue to increase > Unless action is taken, there could be a disproportionate burden on central governments > Governments therefore need to develop multi-pronged financial strategies to manage climate-related risks > Strategies should consider fiscal constraints, the amount of funding needed and when it’s needed > Because public finances are under significant stress, government should weigh the costs and benefits of different approaches > The opportunity costs of alternative uses of the funds as well as the potential benefits of investing further in risk reduction and adaptation > A combination of financial and budgetary tools can apply to transfer, finance, and retain risk > The mix will depend on a country-specific circumstances and budget constraints > The OECD framework can help governments strike the right balance
  • 9. 9 Annex: Funding climate-related risks – which budgetary tools?