A new NEF report warns delayed climate action could sharply increase EU public debt by mid-century, urging governments to expand green investment and reform fiscal rules to support the transition.
The European Union should significantly increase spending on climate action now or face a far heavier public debt burden in the future, according to a new report by the New Economics Foundation (NEF).
The study argues that the EU’s current fiscal projections underestimate the long-term economic costs of climate breakdown. Without stronger investment in climate mitigation and adaptation, the bloc could see debt levels rise sharply over the coming decades.
According to the report, debt-to-GDP ratios across EU member states could be 58 percentage points higher than official projections by 2050 if governments fail to step up efforts to combat the climate crisis.
“Some say European governments don’t have the money to invest in fighting the climate crisis. This research shows the opposite: Europe can’t afford not to,” said Sebastian Mang, EU programme lead at NEF.
Mang added that recent economic shocks, including those linked to the Iran war, reinforce the case for accelerating the shift toward renewable energy.
“If we had spent more or done more to speed up the transition in the last 20 years, we would be in a much better position now and our economy would be more resilient to these kinds of shocks,” he said.
The report says current economic policy frameworks are poorly suited to a world facing growing climate and geopolitical risks. Central banks have mainly responded to surges in food and energy prices by raising interest rates, which increases borrowing costs and makes it more difficult to finance investments in clean energy, infrastructure, housing and food security.
“The result is a damaging contradiction: fiscal authorities are expected to scale up climate investment just as monetary policy constrains their ability to do so,” the report says.
NEF argues that investments contributing to the green transition such as public transportation, electricity grid upgrades, renewable energy projects and heat pumps should be excluded from fiscal rules. It suggests these investments should receive similar flexibility to that granted by the EU for defence spending.
The report models how the EU’s average debt relative to GDP could evolve by 2050 and 2070 under different climate policy scenarios.
If climate investments are postponed until the 2030s before being sharply increased, EU debt-to-GDP levels could end up 53 percentage points higher than current projections by 2050. By 2070 the increase could reach 99 percentage points.
In a scenario where governments act earlier and spend an additional one percent of GDP on tackling the climate crisis along with extra investment in adaptation, debt-to-GDP would be 47 percentage points higher than projected by 2050 and 84 percentage points higher by 2070. This scenario also assumes supportive monetary policy that reduces borrowing costs by 50 basis points.
The most optimistic scenario assumes global cooperation to achieve net zero emissions by 2050, combined with EU spending of an additional one percent of GDP on climate action along with increased adaptation funding. Under this pathway EU debt-to-GDP would be only four percentage points higher than projected by 2050 and would fall by 12 percentage points by 2070.
NEF also cites estimates from the Institut Rousseau indicating the EU will need about 1.6 percent of GDP in additional public investment each year to meet its climate targets for 2040 and 2050.
To support this transition, the report recommends creating a permanent climate resilience facility that would allow common borrowing across the EU while expanding the bloc’s solidarity fund.
“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,” Mang said. “This would also help the role of the euro internationally.”
The report calls for a broader overhaul of EU economic governance, beginning with reform of the European Commission’s debt sustainability analysis to better account for the costs of delaying climate action.
It suggests moving away from rigid borrowing limits toward a preventive framework that includes qualitative assessments of climate and resilience spending.
“Choosing between massive defense spending needs, social spending needs and green investment spending needs are all really difficult political decisions so fiscal rules need to change,” Mang said.
The report also recommends phasing out fossil fuel subsidies, introducing wealth taxes and improving coordination between monetary and fiscal policy. Similar arguments have been made by political economist Ann Pettifor in her new book The Global Casino.
NEF added that central banks should help keep borrowing costs low for investments in green infrastructure, energy security and resilience. Governments, meanwhile, should manage inflationary pressures using tools such as energy price caps, strategic reserves and windfall or excess-profit taxes rather than relying primarily on interest rate increases.
“This does not imply compromising central bank independence, but rather fostering coordination through clear mandates and complementary policy frameworks,” the report said.
