Working group:
The overall economic impacts of climate change and nature loss currently cannot be estimated with sufficient accuracy

Assessing the macroeconomic risks caused by climate change and biodiversity loss requires more advanced analytical methods. Developing these methods, along with tools to evaluate the broader economic impacts of the green transition, remains a significant challenge in Finland and globally. The working group established by the Ministry of Finance proposes measures to strengthen the knowledge base for decision-making.

Currently, macroeconomic estimates, such as growth projections and debt sustainability analyses, are still largely based on the assumption of stable natural systems. These assumptions no longer reflect reality. Climate change, biodiversity loss, and structural changes to the economy from the green transition fundamentally challenge existing analytical frameworks. This means that there is a risk of overestimating economic growth and underestimating government expenditure, especially in the longer term.

Climate change and biodiversity loss affect the economy through many channels. The impacts arise, for example, from the degradation of ecosystem services, extreme weather events and policy measures. Their combined impacts can be significant on the sustainability of government finances and on the stability of the financial system. On the other hand, the changes in economic structures also create new business opportunities. In order to assess the overall economic impacts of the phenomenon, new kinds of expertise are needed. 

On 15 January, the Ministry of Finance established a working group to develop the assessment of the overall economic impacts related to climate change mitigation and adaptation as well as the green transition. As part of its work, the working group surveyed the current situation in Finland as well as international examples, and put together proposals for development measures.

"Climate change and biodiversity loss have wide-ranging impacts on the economy and government finances. To support decision-making, we need better analytical capabilities that cover the entire economy," says Juha Majanen, Permanent Secretary of the Ministry of Finance. 

Deficiencies in information and co-operation structures in Finland

According to the working group, there are few models available for assessing the macroeconomic impacts of climate change and biodiversity loss. There are also clear deficiencies in how these methods are applied. It is not possible to produce all the scenario calculations and analyses needed to properly support decision-making. In addition, there is insufficient coordination between different parties, and the timetables of policy processes and impact assessments have not been sufficiently coordinated. This makes it difficult to use the analysis effectively for decision-making.

International examples highlight the importance of long-term funding, ministries’ expertise and cooperation structures. Finland does not currently reach the level of the reference countries, such as Denmark and Norway. In Finland, key development needs are related to both the knowledge base and institutional structures. 

"Without systematic and clear development measures, we will not be able to adequately respond to the analysis and assessment needs posed by climate and nature risks and their management," says Mikko Spolander, Chair of the working group.

Choices play a decisive role in shaping the direction of development

The working group identified two directions of development to address the challenges of the current situation. The choice between these two directions will have a decisive impact on how well Finland will be able to respond to the analysis and assessment needs arising from the progress of climate change, biodiversity loss and the green transition and the related solutions.

The needs-driven model is based on permanent structures, competence development and long-term funding. It makes it possible to have up-to-date scenarios and analyses to support decision-making.

The model based on the current resources would progress more slowly, requires reallocation of current resources and development efforts remain largely project-based. In this case, the analytical capability would develop to a limited extent.

Key proposals by the working Group

The working group proposes multiple measures to develop the assessment of the overall economic impacts of climate change, the green transition and biodiversity loss, such as:

• clarifying the division of work between ministries and research institutes;
• improving international cooperation;
• harmonising analysis processes and practices;
• establishing permanent bodies responsible for modelling; 
• ensuring funding for the maintenance and development of competence and models.

The working group also proposes that a permanent working group should be established to advance the required impact assessment. Its task would be to promote, develop and coordinate the measures presented in the working group’s report, including funding structures and funding needs in the longer term. 

Change requires political decisions

The development of analytical capabilities requires action from several organisations, such as ministries, research institutes, universities and central banks, regardless of the direction chosen. Some of the measures can be implemented administratively, but key solutions – particularly those related to funding and structures – require political commitment.

The working group included representatives from the Ministry of Finance, the Prime Minister’s Office, the Ministry of the Environment, the Ministry of Economic Affairs and Employment, the Ministry of Transport and Communications, the Ministry of Agriculture and Forestry, Natural Resources Institute Finland (Luke), the Finnish Environment Institute (Syke), VATT Institute for Economic Research, the Technical Research Centre of Finland (VTT), the Bank of Finland, Statistics Finland and experts from the University of Helsinki and Aalto University.

Inquiries:
Mikko Spolander, Director General, Economics Department (MoF), tel. +358 295 530 006, mikko.spolander(at)gov.fi
Saara Tamminen, Vice Chair of the working group, Senior Adviser (PMO), tel. +358 295 160 895, saara.tamminen(at)gov.fi