The Cyprus Institute

Climate change is showing signs that it is proceeding faster than predicted and is developing into a global crisis. Prolonged heat waves with extremely high temperatures, large-scale fires, floods of very unusual intensity and particularly high temperatures on land and at sea indicate that many natural phenomena are being accelerated or exacerbated by climate change. Europe, and especially our region of the south-eastern Mediterranean, is being hit harder than other regions of the world.

 

At the same time, efforts to mitigate the climate crisis allow only cautious optimism. Mitigation can be achieved by reducing the amount of greenhouse gases released into the atmosphere and/or by absorbing quantities of such gases already in the atmosphere. The picture is mixed: On the one hand, the cost of many emission-reducing technologies is falling significantly, and the investments made globally in green technologies have far outstripped those made in conventional fossil fuel technologies. On the other hand, international cooperation, which is absolutely essential to address the climate crisis, is hampered by military conflicts and competition for raw materials, which leads to trade measures (tariffs) that set barriers to the rapid penetration of clean technologies on a global scale.

 

In the European Union, which through the European Green Deal (EGD) is leading initiatives to mitigate climate change, reduce pollution and protect nature, recent political developments give the impression that green policies are in retreat. But this is not the case. The overwhelming majority of EGD legislation has already been adopted, and repealing or reversing it is legally and politically very difficult. Also, the momentum that has developed in much of the business community, due to the acceleration in the adoption of green technologies in Europe, China and North America, indicates that the green transition is in full swing.

 

This does not mean that the pathway to avoid the more dramatic impacts of climate change has been secured, nor that current policies are sufficient to provide adequate protection for nature and biodiversity, which are fundamental elements of climate stabilisation. However, the progress mentioned above underlines the very significant progress that has been made to date – even if it is still not enough.

As mentioned above, the European Union has the most ambitious environmental policy in the world. The European Green Deal, the European Climate Law adopted in July 2021, the "Fit-for-55" package of 13 legislative proposals, almost all of which were adopted in 2023-24, the Nature Restoration Law adopted in June 2024 and other initiatives have led to very ambitious and legally binding targets. Now the priority is to implement all these targets, which reveals many financial and practical difficulties. In the case of Cyprus, apart from the implementation of natural gas investments and electrical interconnection – which are decisions that were taken many years ago and still seem to be valid despite the difficulties – the main new challenges are:

• The need for investment in the expansion and modernisation of the electricity grid.
• The set up of "energy communities" which will allow a large number of citizens to benefit from the reduction in the cost of renewable energy sources.
• The implementation of investments in sustainable mobility infrastructure and in upgrading the quality of public transport.
• Regulatory decisions that will allow the implementation of energy storage investments, the use of electric vehicles to provide flexibility in the electricity grid and the gradual penetration of renewable hydrogen or other green fuels.
• Finding the right workforce to implement all these investments while other sectors of the economy (housing expansion, large land developments) are growing strongly and are not contributing to the green transition, as we explained in a previous Policy Brief.

As we have documented quantitatively and also mentioned in a previous Brief, the gradual transition of Cyprus towards zero greenhouse gas emissions requires significant investments, which will bring greater benefits in the medium term. They will also have short-term costs for consumers and businesses, which will need to be addressed through compensatory measures in the immediate years ahead.

However, these short-term costs should not prevent public authorities from coherently designing a climate policy that is compatible with the legislative commitments of the Republic of Cyprus. Such planning can bring multiple benefits to society and the country's economy, not only because the costs of uncontrolled climate change would be disproportionately higher, as documented by international organisations, but also because climate change mitigation policies make multiple positive contributions such as:

• Decoupling the economy from imported fossil fuels improves the trade balance, lowers inflationary pressures caused by fluctuations in international fuel prices and reduces the exposure of public finances to risks because of the need to provide compensating measures to households and businesses. For example, Cyprus spent EUR 354 million in 2022 to subsidise fuel and electricity prices through reductions in excise duties or other measures, and similar amounts in 2023 as well. It should be noted that the UK Office for Budget Responsibility, taking into account (a) the inflationary pressures and interest rate rises that an increase in energy costs creates, (b) the increase in public spending involved and (c) the need for financial relief for households and businesses, estimated that the UK public debt could be significantly higher in the future if the reliance on fossil fuels continues, compared to its evolution in the case of a green transition. Despite the different structure of the Cypriot economy, its greater dependence on imported energy makes a similar development very likely.
• The energy upgrade of existing buildings, especially those constructed until 2008 when there were no thermal insulation regulations, increases their resilience to extreme weather conditions, thus improving the thermal comfort of their occupants and protecting them against energy poverty. It must be recalled that Cypriot households are among those with high rates of occupants unable to keep their homes sufficiently warm in winter, and a significant proportion of the deaths observed are due to relatively extreme weather conditions within the dwellings (too cold or too hot).
• The green transition will be able to significantly reduce the cost of electricity through a high penetration of renewable energy sources and energy storage, but combined with the operation of a truly competitive electricity market.
• The gradual phase out of fossil fuelled vehicles, either through electrification or by increasing the use of sustainable transport modes, improves the quality of life in cities.
• Protecting the natural environment and enriching soils and vegetation contributes to both mitigation (greenhouse gas absorption) and adaptation to climate change, as it can reduce local warming and protect against extreme events.

Overall, decarbonization policies have many co-benefits that are often ignored when the costs of these policies are publicly discussed.

Regardless of policies to reduce emissions, it is certain that climate change, even if mitigated, will lead to negative impacts in many sectors of the economy. Therefore, a coherent climate policy must also prioritise investments that will enhance the climate resilience of households, businesses and infrastructure in the country. Such actions should focus on:

The European Green Deal emphasises a "just transition" so that the decarbonisation of European economies does not come at the expense of the most vulnerable citizens. Although this principle applies to all countries, it should be noted that Cyprus is in a comparatively better position than most European countries in terms of a just transition, as no jobs are directly threatened. The process of decarbonisation may lead to economic challenges for industrial sectors such as steel, petrochemicals, refineries and the automotive industry – but there is virtually no production in these sectors in Cyprus. Sectors of the Cypriot economy that may be affected such as conventional power generation, the cement industry, and trade of vehicles and fuels are expected to have a smooth transition and will have time to adapt to the new conditions.

 

Often, the estimated costs of green transition measures to households and businesses are compared with the costs of continuing with the status quo. But this comparison is wrong, because the status quo will not continue. Circumstances change, so the costs of the transition should be compared against the costs of not having a climate policy. In regions such as the South-Eastern Mediterranean, which are heavily affected by climate change, without appropriate measures the consequences for vulnerable households and businesses will be severe.

 

A recent pan-European study carried out for the European Economic and Social Committee highlights that Cyprus is expected to be among the countries with the most severe negative impacts on vulnerable households due to climate change. Household expenditure on food, electricity and health services will increase. These expenditure categories are regressive, i.e. poorer households spend a larger share of their income on them. Negative effects on labour productivity and possibly a gradual loss in the value of household property can also be expected.

 

Therefore, both climate change mitigation policies and adaptation measures to the inevitable climate change that is already taking place are in the interest of the Cypriot economy and society. Although studies estimating costs in individual sectors have been sporadically mentioned in this Brief, a more detailed examination of costs and benefits – which is currently lacking – could more comprehensively demonstrate that climate policies lead to a more resilient and equitable society.

The climate crisis and economic prospects

Until recently, estimates by scholars and international organisations suggested that the impact of the climate crisis on economic growth by the end of the 21st century would not be dramatic. Studies based on which the International Monetary Fund and the Network for Greening the Financial System of the World's Central Banks estimated the economic impact of climate change in Cyprus by 2100 at 3-7% of Gross Domestic Product. Their projections were similar for the rest of the world.

However, recent economic analyses, each using different methods, have come up with much higher negative projections. Two independent studies estimate an impact of 5-9% of GDP around 2050 or a little later, i.e. 30-35 years from today. Taking into account the Ministry of Finance's projections for Cyprus' GDP, this impact corresponds to EUR 2.5-5 billion in 2050 at today's prices. As the impact will be gradual, if we assume a linear increase from 2030, the cumulative cost could reach EUR 15-30 billion in the period 2030-2050 in today's prices.

Another study estimates even greater negative impacts, as it examines the effect of extreme weather events on economic activity, and predicts a reduction of more than 10% of GDP in the Middle East region even from a 1 degree Celsius increase in average temperature (already exceeded in our region). These effects will be 'permanent', i.e. they will not be a natural disaster that can be remedied in a short time, but will affect economic activity over a period of many years or decades.

It should be noted that the estimates of these studies are rather conservative, on the one hand because some impacts are not measured through GDP (e.g. human health or ecosystems), so cannot be estimated by these methods, while other impacts (such as sea level rise) cannot be adequately estimated by econometric methods because they have not been observed in the past so as to be properly simulated for the future. On the other hand, because some countries have already taken more adaptation measures (e.g. Cyprus has sufficient air-conditioned spaces in homes and offices), some negative impacts may be overestimated by the studies.

In any case, the conclusion from the recent literature is that the impact of the climate crisis, expressed as a percentage of GDP, can reach double digits in a relatively short period of time. In terms of costs and benefits, this means that climate change mitigation measures that are currently considered relatively expensive can benefit the country many times over compared to the absence of climate policy. Even if the countries of the rest of the world do not follow Europe in equally ambitious climate mitigation efforts, European policies should still be implemented because they will significantly benefit European countries.

Typically, in the public debate and in the priorities of governmental departments, the need for cost-effectiveness and cost-benefit analyses for the techno-economic evaluation of investments and policy measures is mentioned. This is necessary, given that the needs are many but public resources are finite.

 

However, it should be pointed out that, under long-term planning conditions with a 30-50 year horizon and with uncertainties about the dynamics of climate change and the potential of many technological solutions, the above analyses are useful but inadequate. Measures that currently appear too expensive and that a standard cost-benefit analysis would describe as inappropriate are likely to be necessary to prevent worse impacts.

 

For this reason, conventional techno-economic analysis needs to be combined with "Risk-Opportunity Analysis" methods to formulate policy proposals addressing problems with a long-term horizon, high uncertainty and uneven impacts across sectors of the economy. Climate change and the energy transition are obviously among such problems. As the European Environment Agency has shown this year in its European Climate Risk Assessment, the risks of the climate crisis affect the vast majority of public policy areas and should be treated in the same way as national security risks and similarly to how insurance companies treat the corresponding risks in their everyday business.

 

Similar examples are offered by forest fires, with planning prioritising the loss of life, or the safety of coastal infrastructure, so that no critical infrastructure is at risk from flooding or erosion due to sea level rise. In the era of the climate crisis, the unprecedented intensity of certain phenomena leads to the need to treat these phenomena as challenges to national security.

 

Conclusion

In the case of Cyprus, policies to tackle the climate crisis constitute good economic and social policies as well. Decoupling from fossil fuels will promote quality of life and is able to boost economic opportunities and reduce energy costs. Instead of focusing only on the short-term costs of measures to prevent climate change, the serious medium-term benefits for society should be taken into account. This implies following a steady and continuous path towards decarbonisation, with investments, regulatory decisions and economic incentives that will spread the benefits of the green transition to society. Decisions taken must be assessed not against the current situation, which is not sustainable, but against the new business-as-usual, characterised by the risks of climate change already in the immediate years to come, but also by the costs of continuing our dependence on fossil fuels.

The extreme weather events of recent years increasingly suggest that the impacts of climate change may go beyond the economic and climate scenarios we have been dealing with so far. It is therefore imperative that mitigation and adaptation policies designed by the Cypriot authorities compensate for this uncertainty by developing measures that also take into account the impacts of climate risks. Failure to do so could leave the country dangerously exposed to the extreme and unexpected impacts of the climate crisis.