Climate policy is good economic and social policy

By Theodoros Zachariadis

Climate change seems to proceed faster than predicted and is developing into a global crisis, as evidenced by prolonged heat waves with extremely high temperatures, large-scale fires, floods of very unusual intensity and particularly high temperatures on land and at sea. Europe, and especially our region of the south-eastern Mediterranean, is being hit harder than other regions of the world.

Despite barriers to international cooperation like military conflicts, tariffs and competition for raw materials, the momentum that has developed in much of the business community due to the acceleration in the adoption of green technologies in Europe, China and North America, indicates that the green transition is in full swing. This does not mean that the pathway to avoid dramatic impacts of climate change has been secured yet.

The multiple benefits of climate policy

As we have documented quantitatively and mentioned in a previous article in Cyprus Mail last March, the transition of Cyprus towards zero greenhouse gas emissions requires significant investments that will yield greater benefits in the medium term. Short-term costs for consumers and businesses will need to be addressed through compensatory measures. Despite these short-term costs, climate policy can bring multiple benefits to the Cypriot society and economy, not only because the costs of uncontrolled climate change would be disproportionately higher, but also because climate change mitigation policies have multiple benefits:

First, decoupling the economy from imported fossil fuels improves the trade balance, lowers inflationary pressures caused by fluctuations in international fuel prices and reduces the exposure of public finances to risks because of the need to provide compensating measures. For example, Cyprus spent €354 million in 2022 to subsidise fuel and electricity prices through reductions in excise duties or other measures, and similar amounts in 2023.

Second, the energy upgrade of existing buildings increases their resilience to extreme weather conditions, thus improving the thermal comfort of their occupants. Cypriot households are among those with high rates of energy poverty, and a significant proportion of the deaths observed are due to inadequate warming or cooling within dwellings.

Third, the gradual phase out of fossil fuelled vehicles, either through electrification or by increasing the use of sustainable transport modes such as public buses, walking and cycling, improves the quality of life in cities.

Finally, protecting the natural environment and enriching soils and vegetation contributes to both mitigation (greenhouse gas absorption) and adaptation to climate change, as it can reduce local warming and protect against extreme events.

Climate change adaptation is a strategic investment

Climate change is already happening. Even if mitigated in the future, it will still lead to adverse economic impacts. Therefore, climate policy must also prioritise investments that will enhance the resilience of households, businesses and infrastructure. Such actions should focus on:

– Investments in the electricity grid should consider the potential failure of equipment due to high temperatures or prolonged heat waves.

– The protection of coastal infrastructure from rising sea levels. Recent assessments show that sea level rise on the Cypriot coast may affect at least half of the island’s beaches and could cost over €2 billion by 2100 if no action is taken.

– Reducing heat stress for city dwellers through planting and the use of appropriate materials in buildings, pavements and public spaces.

– The adaptation of agriculture. Especially for certain crops, the loss of income due to reduced production can exceed 10-25 per cent. Investment in appropriate adaptation techniques can reduce these costs.

The transition cost for Cyprus

The European Green Deal emphasises a “just transition” so that decarbonisation does not come at the expense of the most vulnerable citizens. Cyprus is in a better position than most European countries in this respect, as no jobs are directly threatened. Sectors of the Cypriot economy that may be affected such as conventional power generation, the cement industry, and trade of vehicles and fuels are expected to have a smooth transition and will have time to adapt to the new conditions.

Often, the estimated costs of green measures are compared with the costs of continuing with the status quo. But this comparison is wrong, because the status quo will not continue. The costs of the transition should be compared against the future costs of no climate policy, which will be dire for vulnerable households. A recent pan-European study carried out for the European Economic and Social Committee highlights that Cyprus is expected to be among the countries with the most severe negative climate change impacts on vulnerable households. Household expenditure on food, electricity and health services will increase. These expenditure categories are regressive, i.e. poorer households spend a larger share of their income on them. Negative effects on labour productivity and possibly a gradual loss in the value of household property is also expected.

Cost-benefit analyses and risk assessments

Typically, in the public debate and in the priorities of governmental departments, the need for cost-benefit analyses for evaluating investments and policy measures is mentioned. This is necessary but inadequate. Conventional techno-economic analysis needs to be combined with risk assessments to address problems with a long-term horizon, high uncertainty and uneven impacts across sectors of the economy. As the European Environment Agency has shown this year in its European Climate Risk Assessment, the risks of the climate crisis affect the vast majority of public policy areas and should be treated in the same way as national security risks and similarly to how insurance companies treat the corresponding risks in their everyday business.

To conclude, policies to tackle the climate crisis constitute good economic and social policies as well. The extreme weather events of recent years increasingly suggest that the impacts of climate change may go beyond the economic and climate scenarios we have been used to so far. It is therefore imperative that climate policies designed by the Cypriot authorities compensate for this uncertainty by developing measures that also consider the serious impacts of climate risks. Failure to do so could leave the country dangerously exposed to the extreme and unexpected impacts of the climate crisis.

Theodoros Zachariadis is a Professor at the Cyprus Institute and a Vice Chair of the Scientific Committee of the European Environment Agency