Climate vs. Budget: Which Fiscal Path is more Sustainable?

Executive Summary

France faces a trade-off between climate ambitions and fiscal rules. The note examines the tension between the need for massive public investment for the climate transition and the constraints of European budgetary rules. It argues that under current rules, reconciling both goals is extremely challenging.

The investment effort required is enormous and clashes with deficit targets. To meet emissions reduction goals and maintain a 1.5 pp primary surplus by 2031, France would need an adjustment (via reallocation, spending cuts, or new revenues) of €200–250 billion over time — equivalently 6 to 8 points of GDP.

Fully exempting climate spending from EU rules is not a viable fix. While “sanctuarizing” all environmental spending (i.e. excluding it from fiscal ceilings) may appear tempting, debt sustainability suffers: debt-to-GDP could climb to ~135 % (optimistic case) or 147 % (if private investment support is limited) by 2050.

At long horizon, climate inaction also erodes fiscal sustainability. Failure to invest now would increase costs from climate damages, raising debt further. Conservative estimates suggest neglecting transition investments would add at least 10 points of GDP to debt by 2050 — creating a vicious cycle.

The path forward must balance both imperatives — but how? The authors model various scenarios: First, a “reference” path respecting EU rules until 2031, then stabilising the primary surplus at 1.5 pp, while financing transition investment. Second, a “sanctuarization” paths with looser primary surpluses (0.3 pp or –0.5 pp) but faster climate investment ramps. They show that none is risk-free, and full exemptions tend to tilt the balance toward fiscal instability.

Key recommendations

1. Adopt partial sanctuarization: exclude only certain climate investments from fiscal ceilings, not full exemption.
2. Mobilize revenue reforms or reallocation to share adjustment burden across budget lines.
3. Strengthen efficiency in public investment, prioritizing projects with highest climate and economic returns.
4. Integrate climate risk into fiscal projections, so future damages are internalized in debt dynamics.
5. Advocate for reform of EU fiscal rules to accommodate transition investments while preserving fiscal discipline.