A major new report has shone a light on the true cost of climate change to economies across the EU.

The report from the New Economics Foundation (NEF), has warned the European Commission’s official debt projections - the so-called Debt Sustainability Analysis - massively underestimate the scale of German and EU debt in relation to gross domestic product (GDP) over the coming decades because they ignore the economic impact of the climate crisis.

It added debt-to-GDP ratios across the European Union (EU) would be 58 percentage points higher than official projections by 2050 if member states fail to increase investment to fight the climate crisis.

If global heating is limited to 1.5 °C, EU countries’ debt-to-GDP would still increase above official projections, but only by 4 percentage points by 2050.

The report added that the climate crisis will damage productivity, infrastructure and key sectors like agriculture, transport, and energy. This will, in turn, increase debt-to-GDP ratios by damaging gross domestic product (GDP) and tax receipts while increasing the costs of repairing and rebuilding after climate disasters. Limiting global heating to a safe level will require high levels of government investment. But the EU’s fiscal rules prohibit sufficient public investment towards climate mitigation and adaptation in an attempt to reduce short-term borrowing.

Sebastian Mang, EU programme lead at the New Economics Foundation, explained: ​“Some say European governments don’t have the money to invest in fighting the climate crisis. This research shows the opposite: Europe cannot afford not to.

“Building a stronger and more resilient economy will not come from rolling back green regulation, but from targeted investment in the infrastructure and technologies that make Europe more competitive and secure: cleaner and cheaper renewable energy, electric vehicles, public transport, and heat pumps, alongside adaptation to extreme weather. It is these investments in shared prosperity that protects public finances, strengthens Europe’s industrial base, and secures good lives for generations to come.

Eurobonds can help by pooling our resources, which would allow us to achieve the transition faster, more cheaply, and more fairly than any member state can alone.”

The report models how the EU’s average debt, in relation to GDP, would change by 2050 and 2070 under various scenarios of climate action:

• Business as usual: The EU continues with existing climate policies with no additional investment. Debt-to-GDP is 58 percentage points higher than projected by 2050 and 197 percentage points higher (almost four times higher than the official projected debt growth) by 2070.
• Delayed EU investment: The EU postpones major climate investments until the 2030s and then ramps up sharply to meet climate targets but fails to invest sufficiently towards adaptation. Delayed action means EU spending on mitigation is more expensive. Debt-to-GDP is 53 percentage points higher than projected by 2050 and 99 percentage points higher by 2070. Compared to business as usual, debt growth has halved by 2070.
• Early EU investment: The EU takes early action by frontloading climate investment and spending an additional 1% of GDP (over and above carbon revenues) on tackling the climate crisis plus additional investment in adapting to a warmer climate. Debt-to-GDP is 47 percentage points higher than projected by 2050 and 84 percentage points higher by 2070. Compared to business as usual, debt growth has more than halved by 2070.
• Global cooperation to reach net zero: The EU spends an additional 1% of GDP (over and above carbon revenues) on tackling the climate crisis plus additional investment in adapting to a warmer climate. Combined with global cooperation, the world achieves net zero emissions by 2050 and heating is limited to 1.5 °C. EU debt-to-GDP is just 4 percentage points higher than projected by 2050 and by 2070, debt has actually dropped by 12 percentage points.

Hans Stegeman, chief economist at Triodos Bank, explained: ​“This report drives home a crucial message: we can leave the economic consequences of climate change out of our models, but not out of our future. Their improved modelling shows that early climate action is our best fiscal option, yet our economic frameworks still reward short-term debt reduction while penalising the investments that would actually protect public finances. A genuine transition requires governments to take the lead, direct private finance toward a fossil-free economy, and redesign the rules of fiscal sustainability to reflect ecological and climate reality.”

NEF said it recommends that the European Commission and European governments reflect the true cost of climate breakdown in their official fiscal forecasts, which play a significant role in determining member states’ fiscal space.

Vital decarbonisation projects like electric and public transportation, grid upgrades, renewable energy, and heat pumps should be excluded from fiscal rules or financed through increased EU borrowing, similar to current defence spending. In addition, NEF recommends that the EU establish a permanent climate resilience facility for common borrows and expand the solidarity fund.