Addressing climate risks through fiscal policy in emerging and developing economies: What do we know and what lies ahead?

This Perspective explores the fiscal challenges and opportunities for Emerging Markets and Developing Economies (EMDEs) as they address climate risks and pursue low-carbon transitions. EMDEs face disproportionate vulnerability to both physical and transition climate risks. Acute events like floods and hurricanes demand substantial public spending on recovery, exacerbating fiscal imbalances, while chronic risks such as rising temperatures and sea-level rise necessitate sustained investments in climate-resilient infrastructure. Transition risks pose further fiscal strain, especially in fossil fuel-dependent economies where decreasing global demand for fossil fuels threatens revenue and risks stranded assets. Our analysis highlights the efforts of some EMDEs in reforming fossil fuel subsidies and issuing green bonds to support renewable energy projects. Despite these advances, significant gaps remain in incorporating climate risks into fiscal policy frameworks and establishing comprehensive green budgeting practices. Findings suggest that EMDEs need to strengthen fiscal resilience through diversified revenue sources and enhanced institutional capacity. Future research should examine strategies for phasing out fossil fuel subsidies, addressing the social impacts of the transition, and mobilizing international climate finance to support EMDEs' long-term sustainability goals.