most estimates of their cost do not consider the potential positive impacts that a shift to a low carbon economy could entail, including the possibility of positive impacts on low‐carbon related innovation as a source of cost reductions and an engine of growth. The New Climate Economy (2018) estimates that bold action could yield a direct economic gain of US$26 trillion through 2030 compared to a business as usual scenario. The OCED (2017) estimates that the combination of economic reforms with ambitious climate policies could spur economic growth in the G20 countries by 2.8 percent (or 4.7 percent, if the avoided climate impacts are taken into account).

# **Fiscal linkages**

# _What are the impacts of climate change on the public sector?_

Physical impacts of climate change generate significant revenue and expenditure pressures and add uncertainty to fiscal management. Climate‐related risks can affect public sector balance sheets in many ways, some of which are illustrated in Table 2. For example, physical risks will have a direct impact on fiscal revenue by hurting the revenue base, on public expenditure for outlays on disaster relief and reconstruction, or on the net‐income of SOEs if their activities are impacted by natural disasters.

However, even in the slow onset scenario, long‐term impacts of climate change can have immediate impacts on fiscal management and sustainability. To the extent that climate change is expected to impact a country’s growth trajectory, this can have an impact on the country’s debt sustainability, borrowing space, and borrowing cost.

Transition risks are particularly high for countries that generate a significant share of public revenue from carbon intensive industries. Lower‐income and conflict‐affected oil and gas exporters (mostly in Africa and the Middle East) are more vulnerable and less able to manage an LCT. They have not yet converted hydrocarbon rents into other sources of export revenues needed to grow and diversify. They also often face major challenges attracting commercial investors and raising affordable finance, although some of them, for example, Mozambique and Ghana, have heavily borrowed against expected extractive revenues and are already burdened with the high cost of debt service (Cust, J. and D. Mihalyi, 2017). Climate policy leaders could help these countries adjust to an LCT through technology, financial cooperation, and trade agreements that would provide them with revenue visibility to invest in low‐carbon growth and diversification.

Coal producers and users face local and social, rather than national and systemic, challenges. Unlike oil and gas exporters, even the largest coal producing countries do not depend on coal revenues and rents for national growth and prosperity, so the macro‐fiscal risk of low‐carbon transition to coal countries is small. The value of coal per energy unit is simply too small to generate foreign exchange large enough to cause Dutch disease. However, some regions that depend on coal mining to create jobs and local income face social challenges because of sticky “stranded labor” and disrupted cultural identities (Stanley et al. 2018; Sartor, 2018). Stranded assets are less of a problem in coal producing countries because coal mining has traditionally been more labor intensive, rather than capital intensive. The systemic risk of an LCT can be transmitted through overreliance on coal‐fired electricity generation (as is the case in Botswana, China, India, Kosovo, Mongolia, Poland, Serbia, and South Africa). Coal mining in OECD countries is already a declining industry that is experiencing massive structural changes, asset repricing, and bankruptcies. However, Australian and Asian coal producers are not yet fully affected by an LCT due to the robust demand for coal in Southeast Asia and Africa. Coal‐dependent industrial sectors, such as iron and steel or 9