Spending in Cyprus to address the risks of the climate crisis remains far below necessary levels, according to a new note by the Fiscal Council of Cyprus, issued ahead of the preparation of the 2026 State Budget and the Medium-Term Fiscal Framework (MTFF) 2026–2028.

The Council warns that Cyprus continues to lag in developing the infrastructure, policies, and mechanisms needed to mitigate the impacts of climate change. “Fiscal, macroeconomic, and social impact estimates should raise serious concern,” it stresses, also pointing to potential political risks as the country is on course to miss its EU climate obligations.

It highlights that the cost of inaction will likely be far higher, with significant implications for public finances, including possible future tax increases or politically “bold” spending cuts.

The Council therefore recommends that national investments be significantly increased—not only to fulfill obligations but also primarily to safeguard the economy, society, and public finances.

High Sensitivity and Exposure to Climate Risks

According to the Fiscal Council, the Cypriot economy—and especially public finances—faces manageable climate adaptation and transition risks. Proposals under discussion for the introduction of green taxation are expected to cover a significant share of financing needs, despite anticipated increases in the cost of transport and heating fuels.

However, when it comes to physical climate risks, the situation is far more severe. Cyprus faces a dual problem of high sensitivity and high exposure. Even under moderate climate scenarios, the country is highly likely to suffer side effects that will strongly impact society, the economy, and public finances.

After years of underinvestment by both the public and private sector, Cyprus still lacks adequate infrastructure and policies to mitigate climate change. The Council reiterates that fiscal, macroeconomic, and social risk assessments “should inspire serious concern.”

Targets Missed, Indicators Worsening

The National Energy and Climate Plan (NECP) is described as lacking ambition, with measures and policies often vague, general, and without implementation timelines. Even where targets are clearly set, implementation progress remains “deeply concerning.”

The Council notes that Cyprus is not only failing to meet its targets but, in many indicators, continues to show deterioration instead of improvement.

Initial estimates place the annual cost of ETS2 (EU Emissions Trading System, second phase) at around €160 million, assuming full NECP implementation. But with Cyprus far from achieving this, the cost of inaction is expected to be significantly higher, likely forcing future tax hikes or deep spending cuts.

Credit Ratings at Risk from Climate Inaction

The Council also highlights growing concern among credit rating agencies, which increasingly factor climate risks into their assessments, alongside ESG criteria (Environmental, Social, Governance). Cyprus risks seeing its ratings downgraded, with wide economic implications.

According to initial ECB estimates, 70% of Cypriot banks’ client portfolios are at “high risk” from climate change, with another 25% at medium risk—placing Cyprus in the second most vulnerable position in the Eurozone.

This could restrict access to credit for businesses and households, raise borrowing costs, and amplify social inequalities. Households are expected to face rising energy, food, and healthcare costs, declining asset values (e.g., housing), and greater pressure on public finances to redistribute income and protect jobs.

The Council warns that the social dimension may become one of the sharpest multipliers of climate change impacts, threatening social cohesion.

Call for Major Increase in National Climate Spending

The Fiscal Council concludes that Cyprus must significantly raise national climate investments to ensure self-protection of the economy, society, and fiscal stability. Even ignoring EU obligations, such investments should be considered a national priority, with particular focus on transport, buildings, and electricity.

The Council criticizes the overreliance on the Recovery and Resilience Plan (RRP) as a substitute for national development spending, rather than a tool for additional reforms and policies.

It urges that the 2026 Budget and MTFF 2026–2028 restore an investment-driven approach, establish strict timelines, measurable progress indicators, and ensure stronger inter-ministerial coordination to avoid further delays.

“Spending on mitigating the impacts of climate change should not be seen as an expense but as an investment in the future,” the Council stresses, adding that the fiscal capacity to support this goal is key and requires curbing rigid, non-productive expenditures.

The Council also refers to findings by the Cyprus Institute, which show that while the costs of mitigation are manageable, the costs of inaction will be many times higher. Current budget allocations, it warns, remain far below what is needed.