Representation of the balance between extreme weather and fiscal stability.
Balancing climate impacts and fiscal stability in Uganda’s energy transition
Increasingly frequent extreme weather events in Uganda are damaging infrastructure, reducing output and forcing emergency spending, which widens the fiscal deficit. New research assessing clean energy transition policies reveals a clear trade-off between reducing emissions and strong macro-fiscal performance – sequencing the transition carefully will be key to achieving inclusive growth in a climate-vulnerable country.
Climate change is no longer a distant risk for Uganda, but a present and costly economic reality. The country is vulnerable to increasingly severe and frequent floods, droughts, and storms, which cause significant damage to infrastructure, reduce economic output, adversely impact welfare, and strain government finances.
Uganda's climate vulnerability is also a macro-fiscal issue
The frequency of natural disasters in Uganda has risen sharply over the past three decades, with floods being the most common hazard. While similar disasters have affected other African economies – including Mozambique, Malawi, and Zimbabwe – the data show that Uganda is more vulnerable and less prepared to respond to climate shocks than its peers in East and Southern Africa.
Figure 1: Trends in disaster frequency in Uganda (1980-2023)
Source: This graph reveals that the number of climate-related disasters in Uganda has risen sharply over the last two decades, with floods being the most frequent hazard and occurring more often over time. Figure generated by the authors using World Bank data.
Figure 2: Vulnerability and readiness indices for African countries (2021)
Source: This graph compares the climate vulnerability and readiness of African countries. Uganda scores high on vulnerability and relatively low on readiness, indicating that it faces greater risks from climate shocks than its neighbours. Figure generated by the authors using data from the Notre Dame Global Initiative (ND-GAIN)
This vulnerability strains fiscal policy by reducing tax revenue and driving up spending on disaster response. Past climate shocks have forced the government to increase spending on social transfers and infrastructure reconstruction, such as repairing roads damaged by floods and mudslides.
Much of this spending comes from reallocating funds from other budget priorities, pushing the fiscal deficit (including grants) to 7.6% of GDP in FY 2024-25 – well above the East African Community’s macroeconomic convergence target of 3%.
In addition to climate-related spending pressures, Uganda’s Paris Agreement target of cutting emissions by 24.7% by 2030 adds further complexity, requiring strategies that reduce emissions while maintaining fiscal stability and inclusive growth.
Designing a model to understand Uganda’s climate transition
Addressing these challenges calls for empirical evidence to inform policies that both reverse adverse climate damage trends and support emission mitigation, without undermining fiscal resilience and sustainable economic growth.
In a new study supported by the International Growth Centre, we use an Environmental Dynamic Stochastic General Equilibrium (DSGE) model calibrated to Uganda’s economy to examine the macro-fiscal impacts of transitioning to clean energy in the face of climate change damages. The model incorporates climate-induced damages, particularly on infrastructure, and assesses the effects of various mitigation and adaptation policies.
How do climate shocks impact fiscal policy and growth?
We find that climate change damages affect macro-fiscal policy outcomes through several pathways, including:
- Government revenues and expenditure: The effect of climate shocks on the fiscal deficit is twofold. Extreme weather events cause damage to capital stock and dampen economic output (tax base), which in turn reduces tax revenue collection and increases the budget deficit and debt accumulation. They also lead to upward pressure on prices, which increases government expenditure and public debt.
- Interest rates: Climate-related damages affect production and productivity, which increase commodity prices and nominal interest rates. This risks increasing the costs of domestic borrowing, thus widening the fiscal deficit.
- Welfare pathway and inclusive growth: Climate-induced damages – such as infrastructural losses – also undermine fiscal policy by reducing household welfare (as reflected in a drop in equivalent variation, which is the money needed to restore household utility after a disaster). These damages increase fiscal pressure by necessitating relief spending, including cash transfers, food aid, healthcare, and relocation.
Through these pathways, climate damages create implicit fiscal risks for the government and compromise the credibility of fiscal policy.
Evaluating the environmental and fiscal viability of clean energy transition policies
We find that subsidising clean capital delivers large emissions reductions and accelerates the clean energy transition, making it the most effective strategy to help Uganda achieve its climate targets. However, this policy option imposes significant economic costs, including reduced output, consumption, employment, household welfare, and a deterioration of the country’s fiscal position.
Alternatively, using emission tax revenues to finance climate adaptation generates better outcomes in terms of economic growth, fiscal balance, tax revenues, debt accumulation, welfare, and real wages. However, it is less effective at reducing emissions.
Our study compares this adaptation policy to other climate action policy options, such as lump-sum rebate transfers to households, which provide modest welfare gains, but limited climate or fiscal benefits compared to the other two options.
The results suggest that, while subsidising clean capital achieves the greatest emission cuts, investing in climate adaptation yields better economic and fiscal outcomes, revealing a key trade-off in policy design. This highlights the importance of integrating climate change policies into macro-fiscal frameworks.
What should policymakers do to manage the energy transition?
Aggressive decarbonisation in countries like Uganda comes with transition risks. The impact of the clean energy transition on the economy will depend on how emission tax revenues are utilised.
Financing adaptation directly through emission tax revenues is a smart hedge – it protects infrastructure, stabilises the economy, and keeps public debt in check while progressively moving toward climate targets.
The Government of Uganda is undertaking several clean energy transition projects. Electricity for cooking has been subsidised, with special lower cooking tariffs for schools. Energy-saving stoves and appliances like pressure cookers are subsidised, and the government has also set up ethanol production plants.
At the same time, rural electrification is expanding to make clean cooking accessible to more households. However, these projects need to be complemented with safeguard policies if they are to be financed by carbon taxation.
Uganda’s clean energy transition must be carefully sequenced and fiscally grounded. This requires:
- Integrating climate policy into macro-fiscal frameworks. Climate change isn’t just an environmental issue, but also a fiscal one.
- Prioritising the use of emission tax revenues for climate adaptation projects like resilient infrastructure.
- Strategically complementing adaptation with clean capital subsidies, carefully designed to limit fiscal risks.
- Extending Uganda’s macroeconomic models to include climate risk analysis for smarter, climate-resilient policy planning.
Well-targeted adaptation investments, funded by emission taxes, can protect the economy today while setting the stage for a greener and fairer tomorrow.