Valuing high temperature's fiscal costs: Evidence from China

Developing effective climate governance policies requires a comprehensive understanding of climate change's costs. However, the existing literature investigates the impacts of climate change on the private sector but neglects to evaluate the fiscal costs. Using fiscal data from Chinese county governments and meteorological data from weather stations from 1995-2019, this paper empirically examines the impacts of climate change, represented by changes in extremely high temperatures, on fiscal sustainability. Our results document that extremely high temperatures significantly increase fiscal expenditure and fiscal balance pressures on local governments. Mechanistically, extremely high temperatures have increased public demand for social and health spending, forcing local governments to increase expenditure. This paper reveals the substantial climate risks embedded in the fiscal sector. Local governments should incorporate the fiscal cost of climate change into their decision-making frameworks when making fiscal decisions and recalculate the costs and benefits of mitigation and adaptation policies.