In a world with mounting impacts of climate change on livelihoods and the broader economy, governments play an increasingly critical role in managing the adverse impacts. As the climate changes, and losses and damages increase, governments are required to increase their resilience and develop strategies for dealing with financial risks of climate change. With a focus on the impacts of climate-related disasters including extreme weather events on the fiscal framework of central governments, this report proposes policy solutions on how governments can reduce, manage and address these climate-related financial risks. It offers a strategic framework that elaborates on the role of governments in the identification and assessment of climate-related physical risks and their impacts on public finances, the mitigation of those risks through investments in risk reduction and risk management, and the development of financial strategies to fund government expenditure needs. The report and its recommendations take into consideration the differences in fiscal resources and borrowing capacities that may exist across countries, assessing the adequacy of different financial and budgetary tools for climate risks of varying frequency and severity and in different national contexts.

The increasing frequency and severity of climate change-related extreme events, including cyclones, floods, and wildfires, are resulting in increasing damages to homes, building and infrastructure with significant implications for livelihoods and the broader economy. Governments have a critical role to play in supporting relief, recovery and reconstruction in the aftermath of climate-related extreme events, to address the resulting financial losses, and in creating an enabling environment that encourages adaptation, risk reduction and financial resilience. This creates pressures on public finances and can result in fiscal risks. Identifying and assessing such climate-related fiscal risks, mitigating these risks across society and ensuring sufficient funding to respond to events when they occur will become an increasingly important component of public financial management and economic policy.

This chapter provides a summary and overview of the strategic framework for government action to manage the risks of losses and damages developed in this report. The goal of the strategic framework is to provide guidance for central governments, regulators and international development community on how to manage climate-related financial risks, from a public financial management perspective.

This chapter provides a short overview of current and projected losses and damages from climate change globally, including physical impacts, as well as their short-term and longer-term economic consequences, summarising the latest evidence. It also briefly discusses the options for managing the public financial consequences of climate risks through risk financing.

Climate hazards affect public expenditures and revenues in multiple ways and across different levels of government. Following a disaster, revenues can fall due to declining economic activity while, at the same time, expenditures increase due to immediate relief needs and longer-term recovery costs. This chapter provides a deeper understanding of government exposure and the impact of climate hazards on public finances in terms of climate-related fiscal risks, while underlining the difficulties in identifying the full costs borne by public finances. It discusses the role of private insurance coverage of losses and damages from climate hazards across different countries, highlighting the linkage between higher insurance coverage and lower demands for social protection and government compensation. It then discusses the integration of climate change in fiscal risk assessment, including in fiscal forecasting and reporting, across OECD countries.

Governments face budgetary constraints that limit their capacity to invest in long-term resilience and ensure adequate funding to respond to climate-related losses and damages through budgetary tools. The materialisation of fiscal risks from climate change can require rapid and significant adjustments to the level and composition of government revenues and expenditures. This chapter discusses the range of tools that governments can use to manage disaster-related costs, including budgetary instruments, such as budget reallocations and contingency and reserve funds, public guarantees for catastrophe risk insurance programmes as well as financial instruments such as debt financing and risk transfer. The chapter also discusses the role of risk prevention investments to reduce risk exposure. The chapter discusses the adequacy of each tool in different national contexts and for climate risks of varying frequency and severity.

This final chapter provides a strategic framework for government action for the financial management of climate-related risks. At national level, it proceeds from the assessment and mitigation of climate-related fiscal risks, to developing multipronged government financial strategies, which take into account the extent of budgetary resources and financing capacities. At the international level, it emphasises the importance of integrated strategies to promote global climate financial resilience through coordinated donor action, particularly in support of economies facing high level of risks and possessing limited resources to manage them.

This section aims to provide a short overview of the past and future hazards based on the IPCC Sixth Assessment report (Shaw et al., 2022[1]). It discusses the observed hazards, the projections for the future, and concludes with a discussion of exposures and vulnerabilities. The Philippines comprises approximately 7,000 islands, most of which can be characterised as mountainous terrain bordered by narrow coastal plains. shows the historical averages of temperature and precipitation (1990-2020). Average temperatures are generally high at 25°C with little variation across the country or throughout the year. Average annual rainfall is approximately 2400 mm, but with significant variation both across the country and the year. Climatological variations in the Philippines are significantly influenced by El Niño Southern Oscillation (ENSO), with El Niño causing droughts and La Niña causing rainfall leading to floods (OECD, 2020[1]).