Adaptive fiscal policy for a hotter world

Climate change is a persistent, systemic ‘super shock’. To respond to this effectively, this report argues that an adaptive fiscal policy needs to assume a structural, resilience-building mission alongside its traditional stabilisation role. The author contends that a temporary rise in public debt from front-loaded climate investment is not fiscal irresponsibility: it is the least risky strategy. Without adaptive fiscal policy, countries will face escalating disasters, weaker growth and sharply higher risk premia, leading to larger and more permanent debt burdens. With it, economies can secure lower future liabilities, stronger productivity and sustained increases in prosperity.

The adaptive fiscal strategy proposed in the report rests on six operational pillars:

1. Green versus legacy debt separation: new debt accounting that distinguishes investment in mitigation and adaptation (‘green debt’) from pre-existing liabilities, governed by a green golden rule and credible repayment sequencing.
2. Climate-adjusted debt sustainability: reformed debt sustainability analyses that feature longer-term horizons (around 20 years), use stochastic frameworks and explicitly incorporate climate shocks, green investment returns and state-contingent fiscal clauses.
3. Risk-sharing mechanisms: regional and global arrangements, guarantees backed by the multilateral development banks, pooled issuance and insurance layers to transfer part of the climate risk away from sovereign balance sheets.
4. Diversified financing strategies: combining sovereign green bonds, debt-for-climate swaps, solidarity levies and upscaled domestic revenue reforms to secure predictable resources.
5. Institutional and regulatory innovation: independent budget evaluation offices, integration of fiscal–monetary coordination, updated credit rating methodologies and global green fiscal funds.
6. Equity and credibility anchors: redistributive transfers to protect vulnerable groups, transparent communication of fiscal rules and green debt envelopes, and proactive engagement with markets to manage risk premia.

The author concludes that adaptive fiscal policy for a hotter world requires fiscal frameworks to move beyond their traditional stabilisation role and the rigidity of debt anchors, and to adopt approaches that are both flexible and credible, and nationally grounded but internationally coordinated. An adaptive fiscal framework offers the least risky path: borrowing today to invest in the transition that secures prosperity and stability tomorrow.

The report is intended as a contribution to the ongoing debate among Ministries of Finance, central banks, regulators and investors on how to redesign macroeconomic frameworks for a hotter, more volatile world.

This report updates the author’s earlier discussion paper published by CETEx in November 2025, ‘Unlocking climate capital for emerging markets and developing economies: an adaptive regulatory and policy reform agenda‘.