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Climate change will have significant financial implications, whether in the form of the impacts from, or the adaptations to, a changing climate, or from the efforts to reduce emissions and mitigate the impacts. This blog looks at how the work of the Scottish Parliament’s Finance and Public Administration (FPAC) Committee relates to the delivery of climate change policy in Scotland. The FPAC can consider and report on any government documents with proposals for, or budgets of public revenue or expenditure, and this blog focuses on this finance side of their remit. The committee also considers the financial memoranda accompanying draft legislation. The blog is one of a series  illustrating how climate change relates to policy areas covered by  subject committees.

Financing climate policy and the financial cost of climate impacts

The impacts on public finances from climate change and climate policy in Scotland are considered in a report from the Scottish Fiscal Commission in March 2024; Fiscal Sustainability Perspectives: Climate Change. It highlights that there are three primary ways that climate change will affect public finances:

Mitigation of climate change as countries transform their economies to reduce greenhouse gases (GHG) emissions to limit further global warming.

Adaptation to climate change, such as through investment to reduce the impacts of climate change damage.

Damage from climate change through countries needing to invest in response to more frequent and intense severe weather events.

This blog is structured by looking at each of these categories and reflecting on the possible financial implications of each in Scotland.

It is, of course, a simplification to consider climate change in solely financial terms; financial compensation cannot cover all damages, and many adaptations to climate change, and emission reduction options do not necessarily require financial investment. Nonetheless, overall, the finances of climate change are of critical importance.

Financing the reduction of Scottish emissions

Overall, there is a clear hierarchy to climate finance with mitigation (reducing emissions), cheaper than adapting, and adapting cheaper than compensating for the impacts. Their levels of investment are also fundamentally related, with the more that is invested in mitigation the less that is needed for adaptation and for damage compensation.

In 2019, the Scottish Parliament passed some of the most ambitious emission reduction targets in the world. At the end of 2024, however, it passed legislation repealing the interim levels of ambition for 2030 and 2040, whilst maintaining the net zero by 2045 goal. A new interim ambition was laid in secondary legislation on the 19th Jun 2025.

At the time the targets were repealed, however, no new ambition was set, and so the Financial Memorandum accompanying the 2024 legislation stated that the changes had ‘no significant cost implications’. The FPA committee set out that they thought this approach was ‘not adequate to ensure the impacts … are being properly addressed’.  The regulations setting the new levels of ambition, do not require the Scottish Government to publish financial information, but the statutory  Climate Change Plan (CCP) that follows these must, for the first time, include ‘an estimate of the costs and benefits associated with the policies set out in the plan’. The Net Zero Energy and Transport (NZET) committee gathered evidence on how this requirement should be implemented earlier in 2025. This CCP has been expected since late 2023, with the current expectation that it will be published in final form by the end of the parliamentary session. This plan will focus on mitigation activity.

Although they have not, as yet, published their own analysis on the levels of investment and possible returns involved in emissions reductions efforts, at the time of the 2019 climate legislation, the Scottish Government reiterated the findings of Climate Change Committee (CCC) analysis, that a central estimate for achieving net zero by 2045 will involve around 1% of GDP.

The CCC recently published their advice to the Scottish Government on Scotland’s Carbon Budgets for 2026-45 and concluded that their pathways to net zero would :

‘generate a net cost for the whole economy in Scotland of around £750 million per year between 2025 and 2050, which is around 0.4% of Scotland’s GDP. The pathway becomes net saving from 2043’.

The net savings that begin in 2043 mean that net zero is predicted to be lower cost than the ‘do nothing’ pathway from this date and continuing past 2050. The main contributors to an overall net saving are the lower cost of running low carbon vehicles and the eventual lower cost of a low carbon electricity system. The move from the predicted cost of 1% of GDP in 2019, to 0.4% in 2025, is in part caused by lower than predicted upfront costs for low carbon vehicles and electricity generation assets. The CCC also re-emphasise that the costs of unaddressed climate change will be greater than the whole economy costs of reducing emissions.

The CCC advice also highlights that responsibility for emission reductions requirements in Scotland is shared with the UK Government. For example, policy in agriculture and land use is seen as largely devolved, whereas in electricity and industry it is seen as largely reserved. These are, however, broad brush classifications with the Scottish Government still playing a key role via planning consents in electricity and industrial developments. Giving evidence on their climate report to the FPA committee in March 2024, the Chair of the Scottish Fiscal Commission set out that:

‘If we look at the broad context around net zero and climate change, however, it comes crashing across devolved and reserved responsibilities in a way that is much more complex than any other area that we have looked at.’

There are some recent SPICe guest blogs on the framework of devolved and reserved powers in Scottish climate policy.

Funding for reducing emissions comes from a mix of public and private sources. Central public funding (from Scottish and UK governments) is used in some areas, for example, heat pump subsidies, or in how agricultural funding is framed. There are also funding sources that are required by government, for example, levies on energy bills which fund some renewable energy and energy efficiency activity. There are many different forms of private funding for low carbon investment. Some involve straightforward consumer expenditure, like choosing to buy an electric car, and some come from businesses, often when they are offered some form of price guarantee from the government, for example for new nuclear power and for renewable energy.

The SFC fiscal sustainability report on climate,  includes estimates  of the share of public and private financing required for emission reduction in different sectors based on 2021 work from the Office for Budget Responsibility. This estimates that 100% of the additional funding for emission reductions in the Land Use and Waste sectors is from public sources, while in other sectors it is assumed that the majority of funding will be private, such as building decarbonisation (57%), surface transport (81%) and agriculture (89%). These are, of course, uncertain estimates, with, for example, much debate as to the suitability of using private finance to fund large scale land use changes – tree planting and peatland restoration.

The fiscal framework for Scotland links available funding in Scotland to spending decisions made elsewhere in the UK. The SFC highlight that climate related policy presents a significant challenge for the fiscal framework, which determines the funding arrangements for a significant part of the Scottish Government’s available financial resources. For example, Scotland accounts for around one third of the UK’s land mass, but only around 8% of the population. There will, therefore, be a need to spend much more per capita to reduce emissions from land use in Scotland. The FPA committee took evidence from the SFC on these issues in March 2024.

The CCC and others note that many of the changes to bring about net zero will be capital intensive but will have lower operating costs (wind and solar require no fuel, electric vehicles are less expensive to run etc.), meaning that the cost of borrowing (interest rates) is more important than in previous energy systems. From a recent report by the Resolution Foundation:

‘at current borrowing costs, capital expenditure accounts for two-thirds (67%) of the cost of energy from an offshore wind turbine, compared with just one-tenth (11%) for a gas-fired power station, where fuel accounts for the vast majority.’

A key area of decarbonisation is that of heating buildings. The establishment of a Green Heat Finance Taskforce was a commitment from the Scottish Government 2021 Heat in Buildings Strategy. The Taskforce’s first report was published in late 2023, and focused on options for individual property owners to access finance to cover the upfront costs of installing low carbon heat. Their second report, published in April 2025,  focuses on ‘clean heat and energy efficiency financing options for place-based delivery, heat networks and social housing retrofit.’

The Scottish National Investment Bank (SNIB) play a role in financing net zero solutions. Between its foundation in November 2020 and the end of 2022, half of the Bank’s ‘total investment portfolio contributed to the shift to a net zero economy’. Projects include £20m for a subsea cable manufacturing plant in Hunterston and £50m for improvements at Ardersier Port in the Moray Firth.

There is a SPICe blog on how the Scottish Government is currently allocating investment for net zero. And finally, it is worth noting that while governments around the world are working to finance emission reductions, they also set the tax and subsidy regimes for fossil fuels. Consumer subsidies for fossil fuel consumption and tax breaks when decommissioning oil and gas assets are viewed by many as fossil fuel subsidies.

Financing adaptation to climate change

There are a range of adaptations to climate change for which there is a clear cost-benefit case. According to the European Environment Agency:

‘Adaptation investments exponentially decrease (economic) losses from climate impacts and bigger investments lead to lower losses; however, there will always be costs from residual climate change impacts that adaptation cannot alleviate’.

The latest Scottish National Adaptation Plan (SNAP) was published in September 2024. It cites an estimate that Scotland will need to spend £1.8bn annually on adapting to climate change by 2030, and that for every £1 spent on protecting against flooding, £9 in property damages can be avoided. Identifying what funding is specifically for climate adaptation is, however, complicated. For instance, how much of flood defence funding can be labelled as climate adaptation funding given that some of this funding may exist in the absence of climate change?

In recent years, the Scottish Budget has included a ‘climate change taxonomy’ with every budget line categorised in terms of whether it is positive, neutral or negative with respect to both emission reduction and climate adaptation. While the 2025-26 budget included £1.2bn of spending classified as positive to adaption, the approach used in this work has been criticised as being too broad-brush to be useful. For example, all of the funding for the public bodies SEPA, NatureScot and Zero Waste Scotland is classified as being positive for adaptation, despite adaptation work only taking up a very small fraction of their actual budget. The £1.2bn figure is, therefore, potentially a significant overestimate of how much public money is currently spent on adapting to climate change. The NZET committee set out the historical and potential future net-zero improvements that could be made to the budget process in a letter to FPA committee in April 2025.

More precise figures on how much is actually being spent on climate adaptation in Scotland are not available, although the SNAP has some relevant figures:

Flood resilience

‘COSLA and Scottish Ministers agreed a 10-year funding commitment to provide £42 million annually to local authorities for flood resilience through the general capital grant. An additional £150 million was committed in the Local Government capital settlement 2021-22 to 2025- 26.  

Road network

‘Investment into a co-ordinated programme for adaptation of trunk roads is critical to protect the gross asset value of £27.6 billion. The delivery of adaptation schemes on the trunk road network has a budget of £6.1 million in 2024/25.’

Rail network

‘There is approximately £400 million of planned infrastructure interventions in the next five years that will deliver some form of resilience to adverse and extreme weather, and longer-term changes in climate.’

Local climate adaptation plans

‘in the 2020-21 Programme for Government, the Scottish Government committed £11.7 million of funding to local authorities to develop Coastal Change Adaptation Plans’  

According to the latest SNAP, the sources of Scottish climate adaption finance will be public as well as ‘responsible private’ and ‘philanthropic’ sources, and may involve ‘new financing structures’. It is often highlighted that it is more challenging to fund climate adaptation than mitigation, in large part because mitigation typically has opportunities for direct financial returns to the investor (selling renewable electricity for example). The sources of finance and the destination of financial returns are critical considerations when thinking about the financing of climate policy. Globally, around 5% of total climate finance is for adaptation and 90% solely for mitigation.

Blended public and private funding structures are addressed in the Climate Adaptation Finance work (2024) from Adaptation Scotland. Part of this work involved the consideration of 15 possible approaches to financing, and their compatibility with three adaptation case studies. Finance models included using payment for ecosystem services, government grants and tourism revenues.

A critical issue in planning adaptation is the uncertainty involved in predicting the impacts of climate change. A flood defence in Brechin cost £16m, was completed in 2015 and was designed to provide a 1-in-200-years standard of defence. The South Esk river breached this defence in 2023, less than 10 years after completion. The project was entirely funded by public funds (80% Scottish Government and 20% local authority).

The uncertainty is, in part, addressed by the CCC, with their Adaptation Committee stating that:

‘For UK Adaptation planning, we therefore consider risks for a 2oC rise in global temperature as our minimum global warming level, and 4oC as a likely upper range’.

Supplementary Guidance for the UK Treasury’s Green Book (guidance on how to appraise policies, also used to inform Scottish government appraisals) requires departments to consider both 2°C and 4°C scenarios when putting together bids for investments with long lifetimes. The Institute for Government report, however, that this guidance is largely seen as optional. There is a useful tool from the BBC that sets out the predicted climate change impacts for any UK postcode at 2oC and 4oC temperature change.

Financing / compensating for the damages from climate change.

It has long been predicted that the costs from the expected damages caused by climate change would substantially outweigh the costs of reducing emissions and mitigating the impacts. A 2024 review of current scientific modelling from the Office for Budget Responsibility found a near consensus that the impact on economic output will be negative. Modelling specific to the UK, include the Bank of England’s prediction that 3.3oC of warming results in a 7.8% reduction in GDP in 2050.

The global climate has, however, already been changed by the anthropogenic release of greenhouse gas (GHG) emissions, and thus some amount of damage is already baked in. With the current level of warming at around 1.3oC (above pre-industrial levels) and the most recent UN Emissions Gap report setting out that current policies will result in 2.6 – 3.1oC of warming, there is likely much more damage to come.

Limiting the scale of further damages is reliant on an aligned, expediated global move to net zero emissions. This multilateral effort is, of course, not something that is within the control of the Scottish or UK Governments, with the primary means for success being international climate negotiations, most commonly seen as part of the annual COP summit.

The principle of funding to compensate for the loss and damage from climate change has become more prominent at recent COP events. Agreed funding runs from wealthier countries to the less wealthy countries affected by climate impacts. At COP26 in Glasgow, Scotland became the first country to commit to a specific loss and damage fund, and in total has now committed around £10m. The Scottish funding has, for example, been used in Malawi to aid recovery from cyclones. At the time of COP29 in 2024, there had been around $700m pledged in total (as part of the Fund Responding to Loss and Damage), from multiple countries, to overall loss and damage funding.

There is no equivalent funding specifically for the impacts of climate change that occur domestically. There are however, funds such as the Bellwin Scheme which allows the Scottish Government to provide additional revenue support to local authorities to assist with the costs of dealing with emergency incidents. For example, Angus Council received £6.9m as a result of Storm Babet in 2023 (largely needed for road repairs). In 2023-24, the Bellwin scheme was activated five times, with a total expenditure of £19.6 million, this is substantially more than the £9.2m allocated in total since 2007. According to the National Flood Resilience Strategy (2024), the cost of flooding impacts in Scotland is now around £260 million per year.

An attribution study from the British, Irish and Dutch Met Office’s found that the rainfall seen in the Winter 23-24 season (when Storm Babet occurred), would have been expected once every 50 years in pre-industrial times, whereas now it can be expected once every five years. Such changes will increase the burden on public finances that are experienced via programmes such as the Bellwin Scheme.

Summary

Climate change raises huge questions for societies and governments in terms of how we live now and how we might have to change. As this blog sets out, financial considerations, how things are paid for, are a key part of this. The finances of climate change are currently most often thought about in terms of how we pay for reductions in emissions, and while this is fundamental, how we fund adaptations to a changing climate, and the costs of climate impacts are of, at least, comparable importance.

Niall Kerr. SPICe