A man works on a generator at Macedonia's ELEM plant - the largest producer of energy in the country. Photo: Tomislav Georgiev/World Bank
The Western Balkans is a climate "hot spot", and North Macedonia is no exception. Over the past 50 years, we’ve seen a dramatic increase in climate-related extreme events in the country: a ten-fold rise in floods, a sixfold increase in extreme heat waves and fires, a fivefold increase in tropical nights, and a doubling of heavy rainfall events. This summer raised concerns further as forest fires burnt the area 16 times the size of Skopje, the capital, and 8 times larger than the area affected by forest fires in 2021, with heat temperature reaching the new highs and length. These events have led to direct asset losses from climate-related disasters totaling over USD 660 million in the past 30 years – the cost of a highway.
Over the past 50 years, we’ve seen a dramatic increase in climate-related extreme events in the country: a ten-fold rise in floods, a sixfold increase in extreme heat waves and fires, a fivefold increase in tropical nights, and a doubling of heavy rainfall events.
Why should the government use fiscal policies for climate action?
Climate impacts will intensify as greenhouse gas emissions (GHGs) continue to rise. This means that North Macedonia will get hotter and drier, with more frequent and severe torrential rains and floods. We need to take urgent actions to mitigate and adapt to climate change, but that’s going to take innovative policies and sizeable investments. North Macedonia has ambitious climate goals—aiming for an 82 percent net reduction in GHG by 2030. Achieving this requires EUR 25 billion in new investments. The government will need to cover around 20 percent of that putting even more pressure on the public budget and further increasing public debt, which is already over 62 percent of GDP.
Government finances are increasingly exposed to climate-related contingent liabilities. These can materialize from physical risks (e.g., floods or fires) or from transition risks (e.g. changes in trade dynamics). Such liabilities can take the form of relief payments or re-construction costs and can either be required by law (i.e., explicit) or implicitly expected due to public pressure. While contingent liabilities aren’t new for North Macedonia, climate-related liabilities are generally more difficult to manage because the risks are so uncertain. It’s clear we need a new approach for an appropriate fiscal response.
Figure 1 - Summary of climate risk transmission channels and broader impacts on public finances. Source: Adapted from Climate-Related Risks for Ministries of Finance and NGFS Climate Scenarios for central banks and supervisors
How can fiscal policies help climate action?
Given the interaction between climate change and public funds, the World Bank’s 2024 Climate Public Finance Review for North Macedonia asks two questions: how does the climate impact public finances, and how can fiscal policy help achieve climate goals, alongside fiscal and economic objectives? Our review found that while climate change poses risks and opportunities for the public budget, fiscal policy can play a crucial role in managing these risks and leveraging opportunities.
Our review found that while climate change poses risks and opportunities for the public budget, fiscal policy can play a crucial role in managing these risks and leveraging opportunities.
Our five main takeaways for policymakers:
1. Mainstream climate into fiscal policy: Proactive planning and risk management can help the government manage climate-related contingent liabilities and avoid potential emergency borrowing which can be costly.
2. Price carbon appropriately – including by removing fossil fuel subsidies. Such efforts can help North Macedonia finance climate action, promote a green transition, and boost fiscal sustainability. Pricing carbon retains revenue that will otherwise be paid to the EU via the Carbon Border Adjustment Mechanism.
Figure 2 - Subsidies in North Macedonia by fuel, 2021. Source: IMF, World Bank, Western Balkan 6 Climate Change Development Report, North Macedonia Country Compendium, forthcoming
3. Invest into adaptation to strengthen resilience: Such investments carry high returns and can help manage macro-fiscal sustainability, promote economic growth as well as managing the climate impacts on public finances.
4. Promote green investments and risk management: Encouraging private sector reporting and disclosure of climate risks, can shift risk away from the government. Without promoting risk management and green investments, the government may bear a disproportionate burden of climate-related risks, limiting economic growth and sustainability efforts.
5. Implement climate budget tagging for transparent allocation of funds: Adopting climate budget tagging to identify, measure, and monitor public expenditures related to climate change mitigation and adaptation, can enhance transparency and accountability in the allocation of public funds for climate action.
Fiscal policies can help manage climate-related risks and leverage opportunities. These could be done through proactive planning, appropriate carbon pricing, investment in adaptation, promotion of green investments and risk management, and implementation of climate budget tagging. These fiscal strategies can help governments manage climate-related contingent liabilities, finance climate action, promote a green transition, strengthen resilience, manage macro-fiscal sustainability, and enhance transparency and accountability in the allocation of public funds for climate action.
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