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2022

SEP

Climate Change and

Energy Security: The

Dilemma or

Opportunity of the

Century?

Serhan Cevik

WP/22/174

IMF Working Paper

European Department

Climate Change and Energy Security: The Dilemma or Opportunity of the Century?

Prepared by Serhan Cevik1

Authorized for distribution by Alfredo Cuevas

September 2022

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments

and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do

not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Abstract

This paper investigates the connection between climate change and energy security in Europe

and provides empirical evidence that these issues are the two faces of the same coin. Using a

panel of 39 countries in Europe over the period 1980–2019, the empirical analysis presented in

this paper indicates that increasing the share of nuclear, renewables, and other non-hydrocarbon

energy and improving energy efficiency could lead to a significant reduction in carbon emissions

and improve energy security throughout Europe. Accordingly, policies and reforms aimed at

shifting away from hydrocarbons and increasing energy efficiency in distribution and consumption

are key to mitigating climate change, reducing energy dependence, and minimizing exposure to

energy price volatility.

JEL Classification Numbers:

Q43; Q47; Q48; Q54; Q55; Q58; H20

Keywords:

Climate change; energy security; carbon emissions; energy

efficiency; Europe; transition economies

Author’s E-Mail Address:

scevik@imf.org

1 The author would like to thank Borja Gracia, Gee Hee Hong, Ian Parry, Hugo Rojas-Romagosa, and the

participants of seminars at the Bank of Lithuania and the European Department of the International Monetary

Fund (IMF) for their insightful comments and suggestions, and Sabiha Mohona and Sadhna Naik for excellent

research assistance.

I. INTRODUCTION

Climate change is accelerating rapidly, with a narrow possibility to escape its worst

environmental and socioeconomic consequences. The global average surface temperature has

already increased by about 1.1 degrees Celsius (°C) compared with the preindustrial average

during 1850–1900, amplifying the frequency and severity of climate shocks across the world

(Figure 1). The risk of extreme weather events, such as heat waves, wildfires, droughts, flooding,

and severe storms, is projected to increase over the next century, as the global mean

temperature continues to rise by as much as 4°C over the next century (IPCC 2007, 2014, 2019;

2021). According to the latest assessment, if greenhouse gas (GHG) emissions remain on the

current growth path, global warming is projected to reach 4-6°C by 2100—an unprecedented

shift with greater probability of larger and irreversible environmental changes unseen in millions

of years that threaten devastation in swathes of the natural world and render many areas

unlivable. Although 189 countries have committed to reduce carbon dioxide (CO2) emissions by

30 percent in 15 years until 2030, global CO2 emissions continued to increase since the 2015

Climate Accord by 2.3 percent to 36.3 billion metric tons in 2021—the highest level in history.

Geopolitical tensions are a stark reminder that energy security remains a critical challenge

for Europe. Besides the death toll, human misery, and destruction of physical capital, Russia’s

invasion of Ukraine has unsettled global energy markets and interrupted the flow of oil and

natural gas to Europe due to international sanctions on Russia. The price of crude oil has

increased from an average of $68 per barrel in 2021 to as high as $124 in 2022, while the price of

natural gas in Europe jumped to a record high of €345 per megawatt-hour, which is the oil

equivalent of $600 per barrel (Figure 2). At the same time, price volatility has hit new heights as a

result of the uncertain output of renewable assets and a tight supply-and-demand balance in the

European power system. Although it is still too early to know how events might unfold, the crisis

will likely result in long-lasting changes in energy supply networks and energy sources in the

generation of electricity. Similar to the emergence of energy security—uninterrupted access to

affordable energy—as a policy concept after the first oil shock of the 1970s, the latest bout of

geopolitical tensions in Europe has rekindled policy discourse on the macro-critical importance

Figure 1. Global Climate Change

Source: NOAA.

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Global Temperature Anomalies

(Degrees Celsius, deviation from trend)

Global Temperature Anomalies

(2018-2019 compared with 1951-1980 average)

/20

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2022SEPClimateChangeandEnergySecurity:TheDilemmaorOpportunityoftheCentury?SerhanCevikWP/22/174©2022InternationalMonetaryFundWP/22/174IMFWorkingPaperEuropeanDepartmentClimateChangeandEnergySecurity:TheDilemmaorOpportunityoftheCentury?PreparedbySerhanCevik1AuthorizedfordistributionbyAlfredoCuevasSeptember2022IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement.AbstractThispaperinvestigatestheconnectionbetweenclimatechangeandenergysecurityinEuropeandprovidesempiricalevidencethattheseissuesarethetwofacesofthesamecoin.Usingapanelof39countriesinEuropeovertheperiod1980–2019,theempiricalanalysispresentedinthispaperindicatesthatincreasingtheshareofnuclear,renewables,andothernon-hydrocarbonenergyandimprovingenergyefficiencycouldleadtoasignificantreductionincarbonemissionsandimproveenergysecuritythroughoutEurope.Accordingly,policiesandreformsaimedatshiftingawayfromhydrocarbonsandincreasingenergyefficiencyindistributionandconsumptionarekeytomitigatingclimatechange,reducingenergydependence,andminimizingexposuretoenergypricevolatility.JELClassificationNumbers:Q43;Q47;Q48;Q54;Q55;Q58;H20Keywords:Climatechange;energysecurity;carbonemissions;energyefficiency;Europe;transitioneconomiesAuthor’sE-MailAddress:scevik@imf.org1TheauthorwouldliketothankBorjaGracia,GeeHeeHong,IanParry,HugoRojas-Romagosa,andtheparticipantsofseminarsattheBankofLithuaniaandtheEuropeanDepartmentoftheInternationalMonetaryFund(IMF)fortheirinsightfulcommentsandsuggestions,andSabihaMohonaandSadhnaNaikforexcellentresearchassistance.I.INTRODUCTIONClimatechangeisacceleratingrapidly,withanarrowpossibilitytoescapeitsworstenvironmentalandsocioeconomicconsequences.Theglobalaveragesurfacetemperaturehasalreadyincreasedbyabout1.1degreesCelsius(°C)comparedwiththepreindustrialaverageduring1850–1900,amplifyingthefrequencyandseverityofclimateshocksacrosstheworld(Figure1).Theriskofextremeweatherevents,suchasheatwaves,wildfires,droughts,flooding,andseverestorms,isprojectedtoincreaseoverthenextcentury,astheglobalmeantemperaturecontinuestorisebyasmuchas4°Coverthenextcentury(IPCC2007,2014,2019;2021).Accordingtothelatestassessment,ifgreenhousegas(GHG)emissionsremainonthecurrentgrowthpath,globalwarmingisprojectedtoreach4-6°Cby2100—anunprecedentedshiftwithgreaterprobabilityoflargerandirreversibleenvironmentalchangesunseeninmillionsofyearsthatthreatendevastationinswathesofthenaturalworldandrendermanyareasunlivable.Although189countrieshavecommittedtoreducecarbondioxide(CO2)emissionsby30percentin15yearsuntil2030,globalCO2emissionscontinuedtoincreasesincethe2015ClimateAccordby2.3percentto36.3billionmetrictonsin2021—thehighestlevelinhistory.GeopoliticaltensionsareastarkreminderthatenergysecurityremainsacriticalchallengeforEurope.Besidesthedeathtoll,humanmisery,anddestructionofphysicalcapital,Russia’sinvasionofUkrainehasunsettledglobalenergymarketsandinterruptedtheflowofoilandnaturalgastoEuropeduetointernationalsanctionsonRussia.Thepriceofcrudeoilhasincreasedfromanaverageof$68perbarrelin2021toashighas$124in2022,whilethepriceofnaturalgasinEuropejumpedtoarecordhighof€345permegawatt-hour,whichistheoilequivalentof$600perbarrel(Figure2).Atthesametime,pricevolatilityhashitnewheightsasaresultoftheuncertainoutputofrenewableassetsandatightsupply-and-demandbalanceintheEuropeanpowersystem.Althoughitisstilltooearlytoknowhoweventsmightunfold,thecrisiswilllikelyresultinlong-lastingchangesinenergysupplynetworksandenergysourcesinthegenerationofelectricity.Similartotheemergenceofenergysecurity—uninterruptedaccesstoaffordableenergy—asapolicyconceptafterthefirstoilshockofthe1970s,thelatestboutofgeopoliticaltensionsinEuropehasrekindledpolicydiscourseonthemacro-criticalimportanceFigure1.GlobalClimateChangeSource:NOAA.-0.6-0.4-0.20.00.20.40.60.81.01.218801890190019101920193019401950196019701980199020002010GlobalTemperatureAnomalies(DegreesCelsius,deviationfromtrend)GlobalTemperatureAnomalies(2018-2019comparedwith1951-1980average)4ofensuringanadequatesupplyofenergyatastableandreasonableprice.Whileitappearslikeadilemma,strengtheningenergysecurityandaddressingclimatechangearethetwofacesofthesamecoin.PoliciesandstructuralreformsaimedatreducingdependenceonfossilfuelswouldthereforedelivernotonlyasignificantreductioninCO2emissions,butalsohelpimproveenergysecuritythroughoutEurope.ChangingtheenergymatrixandimprovingenergyefficiencycouldbringasignificantreductioninCO2emissionsandstrengthenenergysecurity.Movingawayfromfossilfuelsiscertainlynecessarytomitigateclimatechange,andthatrequiresglobalCO2emissionstopeakby2025andreachnetzeroby2050.Unfortunately,thecurrentpaceofCO2emissionsisstillnotconsistentwiththegoalsoftheParisagreement(IPCC,2021).Usingapanelof39countriesinEuropeovertheperiod1980–2019,theempiricalanalysispresentedinthispaperfindsthatincreasingtheshareofnuclear,renewables,andothernon-hydrocarbonenergyandimprovingenergyefficiencycouldcontributetoasignificantreductioninCO2emissionsandimportedsourcesofenergy.Theresultsshowthattheshareofnon-hydrocarbonsourcesofenergyandenergyefficiencyareassociatedwithlowerCO2emissionsandenergyimportsinthelongrun,aftercontrollingforeconomic,demographic,andinstitutionalfactors.ThesestatisticallysignificanteffectsareparticularlymorepronouncedinemergingEuropeaneconomies,indicatingpotentiallysubstantialgainsinbothenvironmentaloutcomesandenergysecurity.Thispapertakesstockofpoliciesandreformscountriesareimplementingtomitigateandadapttoclimatechange.WithinEurope,theBalticSeabasinisparticularlyvulnerabletoglobalwarmingcausedbyclimatechange.TheannualwarmingtrendfortheBalticshasbeenabout0.10°Cperdecade,whichistwiceasmuchastheglobalaverageof0.05°Cperdecade(Aholaandothers,2021).Overthenextcentury,theprojectedincreaseinannualmeansurfacetemperaturewillremainsignificantlyabovetheglobalaverageunderalldifferentscenariosandreachashighas4.3°C(Meierandothers,2022).Althoughglobalwarmingmayinitiallyprovideaboosttoeconomicactivityinthenorthernhemisphere,greatervolatilityinclimaticconditionsandaprojectedincreaseofasmuchas75percentinprecipitationduringwinterintheBalticswillbringsignificantdownsiderisks.Theseadversedevelopmentswillaffectbiodiversity,foodproduction,Figure2.InternationalEnergyPricesSource:IMF.020406080100120140160Jan-00Jul-02Jan-05Jul-07Jan-10Jul-12Jan-15Jul-17Jan-20CrudeOilPrice(US$perbarrel)05101520253035Jan-00Jul-02Jan-05Jul-07Jan-10Jul-12Jan-15Jul-17Jan-20NaturalGasPriceinEurope(US$spermillionmetricBritishthermalunit)5infrastructureandweather-sensitiveothereconomicactivitysuchastransportationandtourism.Accordingly,policiesandreformsaimedatshiftingawayfromhydrocarbonstoalternativesourcesofenergyandincreasingenergyefficiencyindistributionandconsumptionarekeytomitigatingclimatechange,reducingenergydependence,andminimizingexposuretoenergypricevolatility.Tothisend,environmentaltaxation,includingacarbontaxand“feebates”onfossilfuels,couldpromotethetransitiontolow-carbonsourcesofenergyandraiseadditionalfiscalrevenues,whichcanprovideappropriatefundingtocompensatethemostvulnerablehouseholdsandinvestinstructuralresilience.Theremainderofthispaperisstructuredasfollows.SectionIIprovidesanoverviewofpotentialmacroeconomiceffectsofclimatechange.SectionIIIpresentsthedatausedintheanalysisandstylizedfactsonCO2emissions,energysecurity,andenergyefficiencyinEurope.SectionIVpresentstheempiricalanalysisanddiscussesclimatechangemitigationstrategies.SectionVprovidesanoverviewofclimatechangeadaptationstrategies.Finally,SectionVIoffersconcludingremarkswithpolicyrecommendations.II.CLIMATECHANGEANDTHEECONOMYClimaterisksfallintotwocategories—physicalrisksandtransitionrisks—thatcouldalsohavecross-borderspillovers.Climatereferstoadistributionofweatheroutcomesforagivenlocation,andclimatechangedescribesenvironmentalshiftsinthedistributionofweatheroutcomestowardsextremes.Accordingly,climaterisksreflecttheprobabilityorlikelihoodofoccurrenceofweather-relatedhazardouseventsintheforeseeablefutureortrendsmultipliedbytheimpactsoftheseeventsortrendsoccurringoveralongperiodofgenerations.Risksassociatedwithclimatechangefallintotwocategories:(i)physicalrisks;and(ii)transitionrisks.•Physicalrisksofclimatechangerelatetodamagescausedbycurrentweather-relatedevents,suchashurricanes,heatwaves,droughtsorflooding,whichareprojectedtoincreaseinfrequencyandintensity,andlong-termchangesinclimatesuchasglobalwarmingandsea-levelrise.Extremechangesinclimaticconditionscouldsignificantlyreducetheproductivityofcoastalareasandagriculturallandduetoanincreaseinsealevelandchangesinprecipitationpatterns,respectively.Hence,physicalrisksassociatedwithclimatechangemayleadtosignificanteconomicandfinanciallossesduetopotentiallyseveredamagestotheincomeflowandassetportfolioofhouseholds,nonfinancialfirms,banks,andinsurers(Batten,Sowerbutts,andTanaka,2016;Battistonandothers,2017;Campiglioandothers,2018;IMF,2020a,2021;Monasterolo,2020;Ramírez,Thomä,andCebreros,2020).Physicalrisksofclimatechangemayalsohavesignificantimpactonthefiscalpositionanddebtsustainability,withnegativerepercussionsthroughouttheeconomy(CevikandJalles,2020;2021;2022).•Transitionrisksofclimatechangeemanatefromeffortstobuildagreeneconomy.Transitionrisksmaterializewhenchangesintechnology,standards,taxation,andotherpoliciesturncarbon-intensiveassetsintostrandedassetsandamplifylossesthroughfinancialinterconnectedness(Batten,Sowerbutts,andTanaka,2016;Battistonandothers,2017;Caldecott,2018;Campiglioandothers,2018;PointnerandRitzberger-Grünwald2019;IMF,2020a,2021).Thereisanadditionalliabilityrisk,whichreferstothelegalrisks6frompartiesadverselyaffectedbyclimatechangeandclimatechangepolicy(KunreutherandMichel-Kerjan,2007;Ackerman,2017).Therefore,transitionriskscapturetheuncertaintiesrelatedtothetimingandspeedoftheadjustmenttoalow‐carboneconomy.Whilemovingtowardsagreenereconomyisthebeneficialobjective,itgeneratessignificantfinancingneedsandresultsinstructuralchanges.Cross-borderspilloversstemmingfromtheoccurrenceofphysicalandtransitionrisksinothercountriesshouldalsobetakenintoaccount.Cross-borderspilloverofclimaterisksoccurthroughinternationaltradeandsupplychainlinkagesaswellaschangesinstandards,taxationandotherpoliciesintradingpartners(Benzieandothers,2019;Carterandothers,2021;Feng,Li,Prasad,2021).Overall,althoughidentifyingthemacroeconomicimpactofannualvariationinclimaticconditionsremainsachallengingempiricaltask,Gallup,Sachs,andMellinger(1999),Nordhaus(2006),andDell,Jones,andOlken(2012)findthathighertemperaturesresultinasignificantreductionineconomicgrowthindevelopingcountries.Burke,Hsiang,andMiguel(2015)confirmthisfindingandconcludethatanincreaseintemperaturewouldhaveagreaterdamageincountriesthatareconcentratedingeographicareaswithhotterclimates.Usingexpandeddatasets,Acevedoandothers(2018),BurkeandTanutama(2019)andKahnandothers(2019)showthatthelong-termmacroeconomicimpactofweatheranomaliesisunevenacrosscountriesandthateconomicgrowthrespondsnonlinearlytotemperature.Box1.EffectsofClimateChangeSealevelincrease.Sealevelisrisingatanincreasingrate,worseningtheextentofhigh-tidefloodingandstormsurgearoundtheworld.Evenifglobalwarmingstaysbelow2°C,sealevelsareprojectedtosurge2-3metersby2300andby5-7meterswithfasterglobalwarming.By2100,once-in-a-centurycoastalfloodeventswilloccuratleastonceperyearatmorethanhalfofcoastlinesacrosstheglobe.Widespreadflooding.Climatechangeisintensifyingtheriskoffloodsaswellasdroughts.Whilemoreintenseevaporationwillleadtomoredroughts,warmeraircanproduceextremerainfall.Onaverage,thefrequencyofheavydownpourshasalreadyincreasedbyabout30percentandtheycontainabout7percentmorewater.Extremeheatwaves.Extremeheatwaves,suchasthedeadlyonethatoccurredinmanypartsofNorthAmericainsummer2021,arealreadyaboutfivetimesmorelikelytooccurwithexistingwarmingof1.2°C.Withglobalwarmingof2°C,thisfrequencyincreasesto14timesaslikelytooccur.Heatwavesaregettinghotter,andwith2°Cofglobalwarming,thehottesttemperatureswouldreachnearly3°Chigherthanpreviousheatwaves.Severedroughts.Climatechangeisincreasingthefrequencyandseverityofdroughts.Severedroughtsthatusedtohappenatanaverageofonceperdecadearenowoccurringabout70percentmorefrequently.Ifglobalwarmingreaches2°Cabovethepreindustrialaverage,severedroughtswilloccurbetweentwoandthreetimesasoften.Weatherwhiplash.Climatechangeisnotjustincreasingtheseverityofextremeweatherevents,butitisalsointerruptingthenaturalpatternsandcreatinga“weatherwhiplash”—wildswingsbetweendryandwetextremes—destructivefloodsinoneyearandextremedroughtsinthenext.Source:IPCC(2021).7III.DATAOVERVIEWANDSTYLIZEDFACTSThispaperusesanunbalancedpaneldatasetofannualobservationscovering39countriesinEuropeduringtheperiod1980–2019.TheseriesaredrawnfromtheIMF’sInternationalFinancialStatisticsandWorldEconomicOutlookdatabases,theWorldBank’sWorldDevelopmentIndicatorsdatabase,theU.S.EnergyInformationAdministration,andtheInternationalCountryRiskGuide.Summarystatistics,presentedinTable1,indicatelargevariationsinenvironmentaloutcomesintermsofCO2emissionsinmetrictonspercapita2andenergysecurityasmeasuredbytheratioofnetenergyimportstoGDP.Themainexplanatoryvariablesofinterestareenergyefficiency(orintensity)asmeasuredbyenergyconsumptionperunitofrealGDP3andtheshareofnuclear,renewableandothernon-hydrocarbonsourcesofenergy,whichshowconsiderableheterogeneityacrosscountriesandovertime.Followingtheliterature,Iintroduceasetofcontrolvariables,includingrealGDPpercapita,tradeopennessasmeasuredbytheshareofinternationaltradeinGDP,population,theshareofurbanpopulationintotal,andameasureofinstitutionalquality.Itisnecessarytoanalyzethetime-seriespropertiesofthedatatoavoidspuriousresultsbyconductingpanelunitroottests.ThestationarityofallvariablesarecheckedbyapplyingtheIm-Pesaran-Shin(2003)andtheKaravias-Tzavalis(2014)tests,whicharewidelyusedintheempiricalliteraturetoconductapanelunitroottest(withstructuralbreaksinthecaseoftheKaravias-Tzavalis(2014)procedure).Theresults,availableuponrequest,indicatethatthevariablesusedintheanalysisarestationaryafterlogarithmictransformationoruponfirstdifferencing.Table1.SummaryStatisticsThereisconsiderableheterogeneityinthevulnerabilitytoclimatechangeamongEuropeancountries.AspresentedinFigure3,somecountriesinEuropearealmosttwiceas2CO2emissionsrepresentmorethan80percentofgreenhousegasemissionsinEurope.3Whileenergyintensitymeasuresthequantityofenergyrequiredperunitoutputattheaggregatelevel,energyefficiencymeasurestheamountofenergyusedatthedisaggregatedlevelinindividualactivities.Inthispaper,IusethesetermsinterchangeablytocapturetheamountofenergyusedtoproduceaunitofrealGDPinapanelofcountries.AspresentedinthechartsinFigure3,alowerreadingofenergyconsumptionperunitofrealGDPimpliesahigherlevelofenergyefficiency(orintensity).VariableObs.MeanStd.Dev.Min.Max.CO2emissionspercapita1,4717.64.10.634.5Netenergyimports1,36634.9106.5-843.5100.0Energyefficiency1,3615.86.61.6166.9Non-hydrocarbonenergy1,41752.937.50.0100.0RealGDPpercapita1,54425,20421,154619112,373Tradeopenness1,49296.052.713.4380.1Population1,84517,700,00028,200,00021,453149,000,000Urbanization1,80469.714.733.898.1Bureaucraticquality1,2753.11.00.04.0Source:EIA;IMF;WorldBank;author'scalculations.8vulnerabletothreatsassociatedwithclimatechangethanothers.Furthermore,thereisasignificantrelationshipbetweenclimatechangevulnerabilityandresilience.Countrieswithgreatervulnerabilityalsotendtobelessresilienttoclimatechange,accordingtotheND-GAINindices.Inthemeantime,theevolutionofCO2emissionsshowsEurope’sgreaterprogressrelativetotherestoftheworld.Thereisacleardownwardtrendsince1980bothinadvancedanddevelopingEuropeancounties.However,theprevailingtrendinCO2emissions,especiallyonapercapitabasis,isstillnotconsistentwiththepathwaytonetzeroemissionsby2050.ThisislargelyduetoEurope’sdependenceonhydrocarbonsasamajorsourceofenergysource,evenFigure3.ClimateVulnerability,CO2Emissions,EnergyEfficiencySource:ND-GAIN;EIA;WorldBank;author’scalculations.SRBMDAALBROULVAUKRHRVBIHLTUMKDMNESVKHUNCYPESTBGRNLDRUSBLRBELMLTPRTGRCPOLIRLISLITASVNCZEFRALUXGBRDEUFINAUTCHENOR0.20.30.40.50.60.70.80.90.20.250.30.350.40.45ClimateResilienceClimateVulnerabilityClimateResiliencevs.Vulnerability,2019050001000015000200002500030000350004000019801983198619891992199519982001200420072010201320162019WorldEuropeCarbonEmissions(Millionmetrictonnes)02468101219601963196619691972197519781981198419871990199319961999200220052008201120142017WorldEuropeCarbonEmissions(Metrictonspercapita)0246810121419801983198619891992199519982001200420072010201320162019WorldEuropeAverageEnergyEfficiency(1000Btu/2015$GDPPPP)012345678910RUSUKRMLTSRBBLRNORBIHBGRBELFINMDACZESWENLDMNESVKGRCSVNPOLMKDLVALTUESTEnergyEfficiency:2019(1000Btu/2015$GDPPPP)0.000.050.100.150.200.250.300.350.400.45SRBMDAALBROULVAUKRHRVBIHLTUMKDMNESVKHUNCYPESTBGRNLDRUSBLRBELMLTPRTGRCPOLIRLISLITASVNCZEFRALUXGBRDEUFINAUTCHENORClimateVulnerability,20199astheshareofnon-hydrocarbonenergycontinuestoincreaseacrossthecontinent.Animportantconsiderationwiththeenergymixisheavyrelianceonimports,whichaccountforover60percentofallformsofenergyandasmuchas90percentinthecaseofnaturalgas.Inthiscontext,energyefficiencyisacriticalfactorforreducingCO2emissionsandenergyimports.Europehasmadeasignificantprogress—evenmorethantherestoftheworld—inenergyefficiencyandmanagedtoreducetheamountofenergyusedtoproduceaunitofGDPby46.4percentoverthepastfourdecades.Thereis,however,stillconsiderablecross-countryvariation,withtheBalticsleadingtherestinenergyefficiency.IV.CLIMATECHANGEMITIGATIONEuropeancountriesstillhaveampleopportunitiestoreduceCO2emissionsthroughbroad-basedpoliciesandreforms.Inparticular,therearethreekeyareaswheremoreambitiousandcomprehensiveinitiativescouldmakeasignificantcontributiontowardsnet-zeroemissionsthroughoutEurope:(i)eliminatingdistortionaryenergysubsidies;(ii)introducingacarbontaxandfeesonhigh-emissionproductscombinedwithrebatesonlow-emissionproducts;and(iii)improvingenergyefficiencyanddecarbonizingtheenergysector.EnergysubsidiesinEuropecontinuetodistorteconomicincentivesandcontributetoenvironmentaldegradation.SubsidiesonfossilfuelsandelectricityamounttosignificantamountsinsomecountriesinEurope,butthereisconsiderablevariationinthesizeandtypesofenergysubsidies.Fossilfuelsubsidiesarelargerincommodity-richcountries,suchasRussia,whileelectricitysubsidiesaremoreprevalentintherestofthecontinent.4Thewidespreaduseofenergysubsidiesunderminesfiscalsustainability,divertresourcesawayfrommoreproductiveareas(suchaseducationandhealthcare),benefitstherichmorethanthepoor,anddiscouragesefficiencyimprovementsintheenergysector.Consequently,energysubsidieshavebecomeadistortionaryburdenonlong-termeconomicgrowthandtheenvironmentduetooverconsumption.Moreefficientpricingofenergy,ontheotherhand,wouldreduceCO2emissionsbymorethanathirdrelativetothebaselinelevel,keepglobalwarmingbelow1.5°C,raiseadditionalrevenues,andimproveenvironmentalquality(Parry,Black,andVernon,2021).Fiscalpolicymeasures,includingacarbontaxonfossilfuels,arethemostefficienttoolforclimatechangemitigation.Evenamodestcarbonpricecanhelpmobilizeinvestmentinnon-hydrocarbonsourcesofenergy,encouragegreaterenergyefficiency,andtherebyinducesignificantabatementinCO2emissions(IMF,2020b;Blackandothers,2021;Gugler,Haxhimusa,andLiebensteiner,2021;Parry,Black,andRoaf,2021).AslongasCO2emissionsremainfree,thereisnoeffectiveincentivetoalterbehavior.Incontrast,imposingataxonCO2emissionsrelaysapowerfulsignalthroughouttheeconomy.Carbon-intensivegoodsandserviceswouldbecomemoreexpensiveandrebalanceconsumptionpatternstowardlow-carbonoptions.Blackandothers(2021)proposesarangeofcarbontaxesforadvanced,high-incomeemergingmarketsandlow-incomeemergingmarkets—$75,$50and$25permetrictonofCO2emissions,4EvenEUgovernmentsprovided€112billioninsubsidiestotheproductionandconsumptionoffossilfuelsin2021(Nowag,Mundaca,andÅhman,2021).10respectively.5Itisalsonecessarytoconsiderothermeasuressuchas“feebates”—feesonproductswithhighemissionscombinedwithrebatesonproductswithlowemissions—incarbon-intensivesectors.SimulationexercisesconfirmtheeffectivenessofacarbontaxinreducingCO2emissionsinlinewiththeParisAgreement.Thesimulationanalysis,basedontheClimatePolicyAssessmentTool(CPAT)framework(IMF,2019;Parry,Black,andVernon,2021),showsthatfossilfuelsareunderpricedinEuropeancountriesrelativetonegativeexternalities.6Acomprehensivecarbontaxwouldthereforehelpattaintheoptimalpricethattakesintoaccountnegativeexternalitiesandleadstoconvergencetowardstheemissionsreductiontarget.7Table2presentstheimpactofaneconomy-widecarbontaxsettograduallyincreasetoUS$50permetrictonofCO2emissionsby2030.AssumingthatacarbontaxofUS$50permetrictonofCO2emissionsistheonlypolicyinstrumentused,thesimulationresultssuggestthatallBalticcountrieswouldachievereducingGHGemissionsby40percentby2030.Thereis,however,considerablevariationacrosscountries.WhileEstoniaandLatviawouldneedhighercarbontaxestocutemissionsinlinewiththetargets,LithuaniawouldreduceemissionsmorethantargetedwithacarbontaxofUS$50permetricton.Thisvariationintheimpactofacarbontaxreflectscross-countrydifferencesinemission-reductiontargetsandtheexistingenergymix,whichleadtodifferencesintheTable2.ImpactofCarbonTaxintheBalticsandBeyond5Only17percentofemissionsarecoveredbyacarbonprice,whichremainsatanaverageofUS$3permetrictonofCO2emissions.6TheCPATprovidescountry-specificprojectionsoffueluseandCO2emissionsbytheenergy,industrial,transportation,andresidentialsectors.ThemodelisparameterizedusingdatacompiledfromtheIEAonrecentfuelusebycountryandsector.RealGDPprojectionsarefromthelatestIMFforecasts.Dataonenergytaxes,subsidies,andpricesbyenergyproductandcountryiscompiledfrompubliclyavailableandIMFsources,withinputsfromproprietaryandthird-partysources.InternationalenergypricesareprojectedforwardusinganaverageofIEAandIMFprojectionsforcoal,oil,andnaturalgasprices.Assumptionsforfuelpriceresponsivenessarechosentobebroadlyconsistentwithempiricalevidenceandresultsfromenergymodels.7TheBalticsparticipateintheEUEmissionsTradingSystem(ETS),whichcoversonlyabout30percentofnationalCO2emissions.AdditionalFiscalRevenue(percentofGDP)CountryFullrecyclingofcarbontaxNorecyclingofcarbontaxEstonia1.03-0.19-0.57Latvia0.64-0.11-0.35Lithuania0.75-0.13-0.41CzechRepublic1.07-0.20-0.60Germany0.42-0.08-0.23Hungary0.95-0.16-0.52Poland1.38-0.25-0.77Source:Author'scalculations119.8RealGDPGrowthImpact(percentagepoints)CarbonTaxofUS$50by2030ProportionofEmissionsGapNarrowedbyPolicy(percent)29.877.435.540.094.454.6Note:TheimpactofacarbontaxespertonofCO2isdeterminedaccordingtotheCPATframeworkasoutlinedinIMF(2019)andParry,Black,andVernon(2021).11responsivenessofemissionstochangesinfossil-fuelprices.Furthermore,sincetheCPATusespriceelasticityassumptionstodeterminechangestotheenergymix,ifacountryinitiallyhasanexceptionallylowlevelofrenewableenergy,changesinfossil-fuelpriceswillnotelicitalargeincreaseinrenewables.Thus,non-taxpoliciesarenecessarytostimulateinvestmentinalternativesourcesofenergy,andthesepoliciesarenotcoveredintheCPATframework.Theeconomicimpactofacarbontaxvariesfromcountrytocountryaccordingtotheinitialenergymatrixandupstreamlinkagesintheenergysector.SimulationsbasedontheCPATmodelalsoshowthattherewouldbesubstantialrevenuegainsfromtheintroductionofacarbontax,withamoderatenegativeimpactoneconomicgrowth.Thesemacro-fiscaleffectswillvaryfromcountrytocountryaccordingtotheinitialenergymatrixandupstreamlinkagesintheenergysector.Forexample,atUS$50permetrictonofCO2emissions,acarbontaxwouldyieldadditionalrevenueof0.64percentofGDPinLatviaand0.75percentofGDPinLithuaniaandasmuchas1.03percentofGDPinthecaseofEstonia.Theimpactoneconomicgrowth,ontheotherhand,appearstobemoderate(-0.4percentagepointsforLithuania,-0.35forLatviaand-0.6forEstonia)andsmallassumingthatadditionalrevenuesarerecycledbackintotheeconomythroughlowertaxesorhigherinvestmentspending(-0.1percentagepointsinLithuaniaandLatviaand-0.2percentagepointsinEstonia).Furthermore,compensatorypoliciesdesignedtorecycleadditionalrevenuethroughloweringothertaxesandincreasingtargetedcashtransfersandpublicinvestmentcanalleviateadverseeffectsondisposablehouseholdincome.Decarbonizationmuststartintheenergysector,whichisresponsibleforabout80percentofCO2emissionsinEurope.CO2emissionsarearesultof(i)population,(ii)GDPpercapita,(iii)carboncontentofenergyresources,and(iv)energyconsumptionperunitofGDP.ReducingCO2emissionsrequiresthereductionofoneormoreofthesefourfactors,whichimpliesthatpoliciesshouldfocusondecarbonizingtheenergymatrix(lowerCO2emissionsperunitofenergy)andenhancingenergyefficiency(lowerenergyconsumptionperunitofGDP).WhiletheamountofenergyusedtoproduceaunitofGDPdeclinedby55.4percentacrosstheworldoverthepastfourdecadesthankstomoreenergy-efficientproductionprocessesandgreaterenergyefficiencyofconsumergoodsandservices,improvingenergyefficiencyremainsoneofthemostimportantfactorstoreduceCO2emissionsandstrengthenenergysecurity.A.ChangingtheEnergyMatrixIncreasingtheshareofrenewable,nuclearandothernon-hydrocarbonenergyshouldlowerCO2emissionsandstrengthenenergysecurity.ThispaperusesaconceptualframeworkthatrelatestoCO2emissionsandenergysecuritytotechnologicalandregulatoryimprovementsandpolicychoicesasmanifestedinenergyefficiencyandtheshareofnon-hydrocarbonenergy,alongwithmacroeconomicandinstitutionaldeterminants.MovingawayfromfossilfuelscanmakeabigcontributiontoeffortsthroughoutEuropetowardmeetingtheclimatecommitmentsbyreducingCO2emissions.Hence,Iempiricallyinvestigatetheimpactofnuclear,renewableandothernon-hydrocarbonenergyonCO2emissionsinapanelof39countriesinEuropeovertheperiod1980–2019accordingtothefollowingspecification:12𝑦𝑖,𝑡=𝛽1+𝛽2𝐴𝐸𝑖,𝑡+𝛽3𝑋𝑖,𝑡+𝜂𝑖+𝜇𝑡+𝜀𝑖,𝑡where𝑦𝑖,𝑡denotesthelogarithmofCO2emissionsinmetrictonspercapitaorenergysecuritymeasuredbynetenergyimportsasashareofGDPincountryiandtimet;𝐴𝐸𝑖,𝑡istheshareofalternativesourcesofenergyincludingnuclear,renewableandothernon-hydrocarbons;𝑋𝑖,𝑡isavectorofcontrolvariablesincludingthelogarithmofrealGDPpercapita,tradeopenness,thelogarithmofpopulation,theshareofurbanpopulationandameasureofinstitutionalquality,whicharecommonlyusedintheliterature(NarayanandNarayan,2010;PiaggioandPadilla,2012;ÖzbuğdayandErbaş,2015;GökgözandGüvercin,2018;Tajudeen,Wossink,andBanerjee,2018;Xiaandothers,2020;Cevik,2022a;2022b).The𝜂𝑖and𝜇𝑡coefficientsdenotethetime-invariantcountry-specificeffectsandthetimeeffectscontrollingforcommonshocksthatmayaffectCO2emissionsandenergysecurityacrossallcountriesinagivenyear,respectively.𝜀𝑖,𝑡istheerrorterm.Toaccountforpossibleheteroskedasticity,robuststandarderrorsareclusteredatthecountrylevel.Estimationresults,presentedinTable3,confirmthattheshiftawayfromhydrocarbonsourcesofenergyhelpsreduceCO2emissionsandbolstersenergysecurity.Theestimatedcoefficientonnon-hydrocarbonenergyishighlysignificant.InthecaseofallEuropeancountries,a10percentagepointincreaseintheshareofnon-hydrocarbonenergyisassociatedwithlowerCO2emissionsof3percentagepointsinthelongrun,aftercontrollingforeconomic,demographic,andinstitutionalTable3.Non-HydrocarbonEnergy,CO2EmissionsandEnergySecurityAllAEsEMsAllAEsEMsNon-hydrocarbonenergy-0.003-0.001-0.012-0.006-0.003-0.022[0.002][0.001][0.002][0.005][0.002][0.012]RealGDPpercapita0.6180.4190.6890.4470.2291.733[0.117][0.105][0.169][0.310][0.344][0.731]Tradeopenness-0.001-0.001-0.0010.0010.0010.005[0.001][0.001][0.001][0.001][0.002][0.004]Population0.6630.3762.007-0.125-0.1292.176[0.348][0.167][0.298][0.620][0.712][1.483]Urbanization0.0050.0080.0030.0460.0570.052[0.008][0.006][0.008][0.024][0.031][0.073]Bureaucraticquality0.0480.1430.0200.0620.0170.272[0.056][0.048][0.066][0.078][0.098][0.193]Numberofobservations1,145823322874640234Numberofcountries392712372611CountryFEYesYesYesYesYesYesYearFEYesYesYesYesYesYesAdjR20.410.560.780.450.460.44Source:Author'sestimations.CO2EmissionsEnergyImportsNote:Thedependentvariableiscarbonemissionsinmetrictonspercapitaandenergysecurityasmeasuredbytheshareofnetenergyimportsintotalenergyuse.Robuststandarderrors,clusteredatthecountrylevel,arereportedinbrackets.Aconstantisincludedineachregression,butnotshowninthetable.,,anddenotesignificanceatthe10%,5%,and1%levels,respectively.13factors.8ThemagnitudeofthiseffectisevengreateramongemergingEuropeancountries,withacoefficientof-0.012comparedto-0.001inadvancedEuropeaneconomies.Theanalysisalsoshowsthatreducingrelianceonhydrocarbon-basedenergyhasahighlysignificanteffectonenergysecurity.Forthefullsampleofcountries,a10percentagepointincreaseintheshareofnon-hydrocarbonenergyisassociatedwithareductionof6percentagepointsinenergyimports,aftercontrollingforconventionalfactors.Themagnitudeofthiseffectissignificantlygreaterwithacoefficientof-0.022amongemergingEuropeancountriescomparedto-0.003inadvancedeconomies.Allinall,theseempiricalfindingsconfirmthatdecarbonizationnotonlyhasacentralroleinmitigatingCO2emissions,butalsoinbolsteringenergysecuritythroughoutEurope.B.ImprovingEnergyEfficiencyGreaterenergyefficiencybringsasignificantreductioninCO2emissionsandstrengthensenergysecurity.Improvingenergyefficiency—measuredasenergyintensityofeconomicactivity—canmakeabigcontributiontoeffortsthroughoutEuropetowardmeetingtheclimatecommitmentsbyreducingCO2emissionspercapita.ThereisanecdotalevidenceindicatingthatcountrieswithgreaterenergyefficiencytendtohavelowerenergyimportsandCO2emissions,aswellaslowerenergycostforconsumers.Accordingly,thispaperalsoinvestigatestheimpactofenergyefficiencyonCO2emissionsandenergysecurity,asdefinedabove,inapanelof39countriesinEuropeovertheperiod1980–2019,employingthefollowingspecification:𝑦𝑖,𝑡=𝛽1+𝛽2𝐸𝐸𝑖,𝑡+𝛽3𝑋𝑖,𝑡+𝜂𝑖+𝜇𝑡+𝜀𝑖,𝑡where𝑦𝑖,𝑡denotesthelogarithmofCO2emissionspercapitaornetenergyimportsasashareofGDPincountryiandtimet;𝐸𝐸𝑖,𝑡isenergyefficiencyasmeasuredbythelogarithmofenergyconsumptionperunitofrealGDP;𝑋𝑖,𝑡isavectorofcontrolvariablesincludingthelogarithmofrealGDPpercapita,tradeopenness,thelogarithmofpopulation,theshareofurbanpopulation,andameasureofinstitutionalquality.Asabove,the𝜂𝑖and𝜇𝑡coefficientsdenotethetime-invariantcountry-specificeffectsandthetimeeffectscontrollingforcommonshocksthatmayaffectCO2emissionsandenergysecurityacrossallcountries,respectively.𝜀𝑖,𝑡istheerrorterm.Toaccountforpossibleheteroskedasticity,robuststandarderrorsareclusteredatthecountrylevel.Estimationresults,presentedinTable4,confirmthatimprovingenergyefficiencyreducesCO2emissionsandstrengthensenergysecurity.Theestimatedcoefficientonenergyefficiencyiseconomicallyandstatisticallyhighlysignificant.Broadlyinlinewithpreviousstudies,a10percentagepointincreaseinenergyefficiencyisassociatedwithlowerCO2emissionsof8.8percentagepointsandenergyimportsofabout2percentoverthelongrun,aftercontrollingforeconomic,demographic,andinstitutionalfactors.Theseeffectsofenergyefficiencyaresignificantacrossallcountrygroups,butappeartobestrongeramongadvancedeconomies,whichcouldreflectgreaterefficiencygainsinadvancedeconomiesinthepast.Nevertheless,thesefindingsindicatethatimprovingenergyefficiencycanplayafundamentalroleinmitigatingCO2emissionsandstrengtheningenergysecuritybyreducingdependenceonimportedsourcesofenergy.Therefore,to8Theestimatedcoefficientsoncontrolvariableshavetheexpectedsignsandsomearealsostatisticallysignificant.14decarbonizeeconomicactivity,policiesandreformsshouldaimtoimproveenergyefficiencyincommercialandresidentialuseasmuchasshiftingtheenergymatrixawayfromfossilfuels.Table4.EnergyEfficiency,CO2EmissionsandEnergySecurityV.CLIMATECHANGEADAPTATIONEuropeancountriesneedtomainstreamclimatechangeadaptationintodevelopmentplanstobecomemoreresilient.Long-termrisksassociatedwithclimatechangecannotbecompletelyeliminated,whichmeansgovernmentmusttakedecisiveactiontostrengthenphysical,financial,institutionalandsocialresilience.Avarietyofadaptationmeasureshavebeenintroducedtoenhanceresiliencetoclimatechange,buttherearestillsignificantgapsthatkeeptheregionvulnerabletothreatsassociatedwithclimatechange.Enhancingstructuralresiliencerequiresinfrastructureandotherex-anteinvestmentstolimittheimpactofdisasters,including“hard”policymeasures(e.g.,upgradingpublicinfrastructure),and“soft”measures(e.g.developingearlywarningsystemsandstrengtheningzoningandbuildingcodes);buildingfinancialresilienceinvolvescreatingfiscalbuffersandusingprearrangedfinancialinstrumentstoprotectfiscalsustainabilityandmanagerecoverycosts;andpost-disasterandsocialresiliencerequirescontingencyplanningandrelatedinvestmentsensuringaspeedyresponsetoadisaster.Thereareupfrontfiscalcostsofclimatechangeadaptationbutinvestinginstructuralresiliencewouldyieldlong-runbenefits.Althoughclimatechangeadaptationhassignificantupfrontcosts,thelackofinactionontheclimatefrontwouldhaveanevengreatercostforAllAEsEMsAllAEsEMsEnergyefficiency-0.088-0.121-0.046-0.019-0.047-0.013[0.015][0.013][0.014][0.040][0.038][0.049]RealGDPpercapita0.8750.8600.6780.4020.1931.663[0.106][0.124][0.163][0.305][0.330][0.763]Tradeopenness-0.001-0.000-0.0020.0010.0010.006[0.001][0.001][0.001][0.001][0.002][0.005]Population0.0040.3011.0650.3650.5002.096[0.237][0.214][0.273][0.513][0.684][1.901]Urbanization0.0060.0050.0050.0440.0570.064[0.005][0.004][0.008][0.023][0.030][0.067]Bureaucraticquality0.0280.0760.0150.0540.0280.282[0.031][0.039][0.050][0.076][0.082][0.228]Numberofobservations1,143825318880646234Numberofcountries382612362511CountryFEYesYesYesYesYesYesYearFEYesYesYesYesYesYesAdjR20.620.670.740.450.460.39Source:Author'sestimations.CO2EmissionsEnergyImportsNote:Thedependentvariableiscarbonemissionsinmetrictonspercapitaandenergysecurityasmeasuredbytheshareofnetenergyimportsintotalenergyuse.Robuststandarderrors,clusteredatthecountrylevel,arereportedinbrackets.Aconstantisincludedineachregression,butnotshowninthetable.,,anddenotesignificanceatthe10%,5%,and1%levels,respectively.15generations.Furthermore,investinginclimate-resilientinfrastructurewouldreducedamagefromnaturaldisastersandincreaseexpectedreturnstoprivateinvestmentandoutput.Well-designedpolicymeasurescouldalsohavesustainedexpansionaryeffectsthroughhighergrowthinemploymentandwagesandlowermigration,whichtendstooccurincountriesthataremorevulnerabletoclimate-relatednaturaldisasters.Nature-basedsolutionsareessentialinthefightagainstclimatechangeandcouldalsocontributetothedevelopmentofnewbusinessopportunities.Thereisgrowingrecognitionthatclimatechangeiscausingbiodiversitylossacrosstheworld,whilenaturehasafundamentalroleinclimatechangemitigationandadaptation(IPBES,2019).Inviewoftheseinterlinkages,nature-basedsolutions—designedtoprotect,sustainablymanageandrestorenaturalecosystems—canbecomehighlyeffectiveinprovidingeconomicwell-beingaswellasgreaterbiodiversitybenefits.Inparticular,nature-basedsolutionscanbeappliedtoaddressarangeofclimaterisks,includingcoastalhazards,floodsandsoilerosion,andrisingtemperaturesanddrought(Kaposandothers,2019).Anotherimportantadvantageofnature-basedsolutionsforadaptationisthecost,whichtendstobesignificantlylessthantraditionalinfrastructureforaddressingclimatehazards(Narayanandothers,2016;Regueroandothers,2020)andgeneratesubstantialeconomicandsocialbenefits(Rizvi,2014;Menéndezandothers,2020;Seddonandothers,2020).Financingclimatechangemitigationandadaptationeffortswillrequiremobilizingadditionalresourcesandreformingpublicfinancialmanagement.Adaptingtoclimatechangeisnotcheap,anditwillrequiresubstantialamountofadditionalupfrontresourcestoinvestinphysicalinfrastructureandotherkeyareastoincreaseresilienceandlessenthemacro-financialimpactofclimatechange.Inthiscontext,greenfinancingcouldprovidevaluableresourcesforsustainableinvestmentprojects.Thesustainability-linkeddebtmarkethasreachedUS$2.5trillionwithnetnewissuanceofUS$660billionin2020.Themostsignificantcomponentofthismarketintermsofsizeandenvironmentalimpactisgreenbondsthatareusedtofinanceprojectstofacilitateclimatechangeadaptationandmitigation.Despiteitsrapidgrowth,however,sovereigngreenbondsremainsmall—about1percent—comparedtotraditionaldebtinstrumentsissuedbygovernments.Countrieswithsignificantclimate-relatedinvestmentneedsmustimprovetheinstitutionalframework,includingrobustandtransparentpublicfinancialmanagementsystemsandprocesses,togainfullaccesstotheglobalflowofgreenfinancing(Mejía-Escobar,González-Ruiz,andFranco-Sepúlveda,2021).VI.CONCLUSIONEuropeisfacingthedoublejeopardyofclimatechangeandenergyinsecurity,withfar-reachingeconomicandfinancialrepercussions.Theglobalaveragesurfacetemperaturehasalreadyincreasedbyabout1.1degrees°Ccomparedwiththepreindustrialaverage,whichamplifiesthefrequencyandseverityofclimateshocksacrosstheworld.WithinEurope,theBalticSearegionisparticularlyvulnerabletoglobalwarmingcausedbyclimatechange,withanannualwarmingtrendtwiceasmuchastheglobalaverage.Atthesame,theexplosionofgeopoliticaltensionstriggeredbyRussia’sinvasionofUkrainehasunsettledglobalenergymarkets.Whileitisstilltooearlytoknowhoweventsmightunfold,thecrisiswilllikelyresultinlong-lastingchanges16inenergysupplynetworksandenergysourcesinthegenerationofelectricity.Thisiswhyaddressingclimatechangeandstrengtheningenergysecurityarethetwofacesofthesamecoin.PoliciesandstructuralreformsaimedatreducingdependenceonfossilfuelswoulddelivernotonlyasignificantreductioninCO2emissions,butalsohelpimproveenergysecuritythroughoutEurope.Well-designedpoliciesandstructuralreformswouldhelpreduceCO2emissionsandstrengthenenergysecurity.Toguardagainstthreatsassociatedwithclimatechange,countriesneedtoproceedontwofronts:(i)climatemitigation,whichreferstopoliciesthathelpreduceCO2emissionsand(ii)climateadaptation,whichreferstoeffortstoadapttotheeffectsofclimatechangeincludingthroughminimizingdamagesfromclimate-relateddisastersaswellastoadapttotheeffectsofeconomictransformations.Usingapanelof39countriesinEuropeovertheperiod1980–2019,theempiricalanalysispresentedinthispaperindicatesthatincreasingtheshareofnuclear,renewables,andothernon-hydrocarbonenergyandimprovingenergyefficiencycouldleadtoasignificantreductioninCO2emissionsandimproveenergysecuritythroughoutEurope.9Fromarisk-rewardperspective,thebenefitsofreducingtherisksofclimatechangeandstrengtheningenergysecurityclearlyoutweighthepotentialcostofmitigationpoliciesintheshortrun.Environmentaltaxes,includingacomprehensive,economy-widecarbontaxonfossilfuels,couldalsoraiseconsiderablerevenues,whichcanexpandthepost-pandemicfiscalspaceandprovideadditionalfundingtocompensatethemostvulnerablehouseholds,buildamultilayeredsafetynet,andstrengthenstructuralresilience.Europeancountriesmustmainstreamadaptationintodevelopmentplanstostrengthenresilienceagainstclimatechange.Long-termclimateriskscannotbecompletelyeliminated,andthusgovernmentsmusttakedecisiveactiontostrengthenphysical,financial,institutionalandsocialresilience.AvarietyofadaptationmeasureshavebeenintroducedtoenhanceresiliencetoclimatechangethroughoutEurope,buttherearestillsignificantgapsthatkeepsomecountries,suchastheBaltics,morevulnerabletothreatsassociatedwithclimatechange.Enhancingstructuralresiliencerequiresinfrastructureandotherex-anteinvestmentstolimittheimpactofdisasters,whilebuildingfinancialresilienceinvolvescreatingfiscalbuffersandusingprearrangedfinancialinstrumentstoprotectfiscalsustainabilityandmanagerecoverycosts.Thesemeasureswillhaveupfrontfiscalcosts,butthelackofinactionontheclimatefrontwouldhaveanevengreatercostforgenerations.Furthermore,strengtheningphysicalandfinancialresiliencewouldreducedamagesfromclimatechangeandincreaseexpectedreturnstoprivateinvestmentandoutput.9Therearealsostudiesshowingthatincreasingtheshareofrenewablesourcesofenergyhasapositiveeffectoneconomicgrowth(NarayanandDoytch,2017;DoytchandNarayan,2021).REFERENCESAckerman,F.,2017,Worst-CaseEconomics:ExtremeEventsinClimateandFinance(NewYork:AnthemPress).Ahola,M.,andothers,2021,“ClimateChangeintheBalticSea:2021FactSheet,”BalticSeaEnvironmentProceedings(BSEP)No.180(Helsinki:HelsinkiCommission).Acevedo,S.,M.Mrkaic,N.Novta,E.Pugacheva,andP.Topalova(2018)“TheEffectsofWeatherShocksonEconomicActivity:WhatAretheChannelsofImpact?”IMFWorkingPaperNo.18/144(Washington,DC:InternationalMonetaryFund).Batten,S.,R.Sowerbutts,andM.Tanaka,2016,“Let'sTalkAbouttheWeather:TheImpactofClimateChangeonCentralBanks,”BankofEnglandStaffWorkingPaperNo.603(London:BankofEngland).Battiston,S.,andothers,2017,“AClimateStress-TestoftheFinancialSystem,”NatureClimateChange,Vol.7,pp.283–288.Benzie,M.,andothers,2021,“Cross-BorderClimateChangeImpacts:ImplicationsfortheEuropeanUnion,”Regional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