Fiscal Council warns delayed climate action will be costly

Spending to tackle the risks of the climate crisis in Cyprus remains far below what is necessary, according to a statement released on Monday by Cyprus’ national Fiscal Council.

The warning comes ahead of preparations for the 2026 Budget and the Medium-Term Fiscal Framework 2026-2028.

The Fiscal Council said Cyprus continues to lag in developing infrastructure, policies, and other tools to mitigate the impacts of climate change.

“Impact estimates at fiscal, macroeconomic, and social levels must be a cause for concern,” it said, adding there is also potential political risk as Cyprus is on a trajectory of failing to meet its European Union obligations.

It stressed that the cost of inaction should be considered significantly higher, with implications for public finances and potential future tax increases or politically bold spending cuts.

As a result, it recommends that national investments be increased substantially to not only fulfil obligations more fully but primarily to protect the economy, society, and public finances.

The Fiscal Council highlighted that the Cypriot economy and public finances face manageable climate adaptation and transition risks.

It added that proposals for the introduction of green taxation are expected to cover a significant portion of estimated funding needs, despite anticipated high increases in fuel and heating costs.

However, it warned that the same cannot be said for the natural risk of climate change.

“The Cypriot economy faces a dual problem of high sensitivity and high exposure. It is therefore particularly likely that we will experience climate change side effects, and such side effects will have a serious impact on society, the economy, and public finances,” it said, emphasising that this applies even under moderate climate scenarios.

The Fiscal Council explained that after many years of insufficient investment from both the public and private sectors, Cyprus still lags in developing infrastructure, policies, and other measures to mitigate climate change impacts.

“Impact estimates at fiscal, macroeconomic, and social levels must be a cause for concern,” it said.

It pointed out that the National Energy and Climate Plan lacks ambition, as highlighted by the European Commission, and that the measures, policies, and actions it contains remain vague, general, and often without implementation timelines.

Even where goals and policies are clearly defined, the pace of implementation gives serious cause for concern.

The most significant risks identified by related models and analyses relate to the natural risk to which the economy and society are exposed.

“However, we also highlight the political risk as Cyprus is on a trajectory of failing to meet its obligations to the EU,” it added.

Initial estimates for the cost of the Emissions Trading System second phase place it at around €160 million annually, but this assumes full implementation of the National Energy and Climate Plan.

“Cyprus is far from such a scenario, and the cost of inaction should be considered significantly higher, with implications for public finances and potential future tax increases or politically bold spending cuts,” the Fiscal Council said.

It also stressed that in terms of progress towards achieving the plan’s goals and obligations, delays continue and in many indicators deterioration is observed.

“Slow and insufficient progress is already reflected in analyses by the European Parliament, the European Commission, and the IMF, while expert analyses reach similar conclusions. The same applies to other evaluations not specifically related to climate risk,” it said.

The Fiscal Council highlighted a growing tendency among rating agencies to consider climate risk in their evaluations, beyond the introduction of ESG frameworks in algorithms.

“This development may also affect Cyprus’ future ratings, with all the consequences that entails,” it warned.

It added that the risk also concerns credit, with analyses predicting risk diffusion across financial institutions’ portfolios, which would require them to price risk for prudential and supervisory compliance.

Such a scenario could place significant parts of the business sector and society outside the loan market or expose them to higher credit costs, with multiple repercussions.

Initial ECB estimates place 70 per cent of bank clients at high climate risk, with an additional 25 per cent at medium risk, positioning Cyprus as the second most vulnerable country in the Eurozone.

“While transition risk for businesses is low for our country, the natural risk is particularly high,” it added.

The council also warned that climate change costs for households are expected to increase social inequalities and require significant public spending to redistribute income and wealth, as well as to protect assets and jobs.

It said energy demand and costs, social protection and healthcare prevention costs, and food costs are expected to rise among the highest rates in the EU.

Increased asset value losses, such as residential property, are also anticipated for households.

The Council stressed that the expected rise in costs and loss of assets and incomes is inherently regressive, putting social cohesion at risk.

“Based on the above, we estimate that the social dimension may become one of the most acute channels amplifying the impacts of climate change,” it said.

As a result, it recommended a significant increase in national investments to protect the economy, society, and public finances, beyond merely meeting obligations.

“Even if we ignore the Republic’s existing obligations, national investments to mitigate the impacts of climate change should be considered a priority for self-protection of the country from emerging macroeconomic, social, and fiscal risks,” it said, emphasising the need to focus on transport, buildings, and electricity.

The projected reduction of development spending in 2027-2028 should not only be avoided but spending should focus on mitigation and emerging needs, the council said.

“Unfortunately, the Recovery and Resilience Plan has functioned as a substitute for the Republic’s own development spending, as has happened in other EU Member States, making it the main source of development dynamics instead of financing reforms and policies that could not have been implemented otherwise,” it said.

It stressed that the 2026 Budget and Medium-Term Fiscal Framework should restore an investment logic for public spending while managing inflationary pressures.

The council also called for clear timelines and measurable progress assessments, together with continuous monitoring of national strategy implementation, where progress remains largely concerning.

Explicit and strict mandates should be given to ministries, departments, and agencies to prioritise obligations arising from the National Energy and Climate Plan without further delays and to improve coordination, it said.

“We believe that public spending on climate change mitigation should not be seen as an expense but as an investment for the future. Fiscal capacity for this purpose is key, and we therefore reiterate the need to contain inflexible spending,” it said.

It highlighted that risks remain elevated both through 2035 and 2050 and that the necessary infrastructure and measures are already delayed.

Moreover, the council referenced Cyprus Institute analyses showing that the cost of measures is manageable for the economy, while the cost of inaction will be multiple times higher.

It concluded by saying that “current budgeted spending is far below what is required“.