Between 1980-2024, extreme weather cost the European Union €822 billion in damage, with one quarter occurring between 2021-2024 alone. As the frequency and intensity of such events – and the damage they inflict – accelerate, so too does the burden on public finances.
To see how national governments deal with disasters, we analysed four recent cases: the 2021 western European floods, the 2022 Romanian drought, the 2023 Slovenian floods and the 2024 Valencia floods. While climate disasters are inevitable, governments could take the following measures to better prepare for their fiscal implications.
Public and private investment in climate adaptation should increase to cut the overall cost of disasters. In Valencia, underinvestment in hydraulic infrastructure magnified flood losses; in Germany, fragmented data-sharing caused early warning systems to fail. Investment in climate adaptation lowers the exposure and vulnerability of assets to climate hazards, reducing overall damage and the need for emergency relief and reconstruction spending.
The private insurance protection gap must be closed to prevent governments from systematically becoming the insurer of last resort – shifting the burden towards a shared system of risk management. The status quo of unconditional government compensation reduces insurance incentives, leaving public budgets more exposed and contributing to 80% of EU climate losses being uninsured. Clearer limits on state compensation alongside mandatory coverage requirements are needed to close this gap. Spain’s catastrophe fund, funded through compulsory premiums, shows that pre-funded insurance can reduce uninsured losses and limit the burden on public budgets.
States should establish pre-funded, rule-based relief funds with build-back-better conditions to replace the current regime of ad-hoc, inefficient national financing instruments, which often cannibalise public investment in climate resilience. At the EU level, a European risk-sharing instrument would prevent individual national budgets from bearing losses alone and reflect the transnational nature of climate risks.
The EU’s forthcoming Climate Resilience and Risk Management Framework is an opportunity for such a strategy. The EU must seize it.
Look out for the forthcoming Policy Brief, ‘Planning for the rising fiscal costs of climate disasters’, by Heather Grabbe, Ugnė Keliauskaitė, Marie-Sophie Lappe, Irene Monasterolo, Massimo Tavoni and Georg Zachmann