The costs of climate change are highly uncertain, but represent a significant risk to the public finances in all the scenarios explored by the UK’s Office for Budgetary Responsibility (OBR). These costs come from both transitioning the economy to net zero emissions, and from damage to the economy caused by climate change. However, the latter is the more significant fiscal cost in the scenarios the OBR presents.

It now estimates the costs to government of the transition to net zero at 21%of GDP, which is 9% of GDP lower than the previous estimates in the 2021 report. This is mainly due to downward revisions to the Climate Change Committee’s (CCC’s) estimates of whole-economy costs and reduced costs of lost fuel duty revenues due to successive decisions to freeze fuel duties and higher recent take-up of electric vehicles.

In the 2025 Spending Review, the UK Government’s allocations to net zero spending over the next five years are within the CCC’s range of estimates of the public investment needed to meet the net zero target by 2050.

The OBR says that the estimated fiscal costs of climate damage have risen since the previous estimates in 2024. In the below 3°C scenario, it estimates these costs increase debt 56% of GDP compared with the no-climate scenario – a 23% of GDP increase compared with the estimates in 2024. This is due to an increase in the estimated impact of climate damage in the below 3°C scenario on UK GDP, from 5% in 2024 to 8% in the 2025 report.

Unlike transition costs, there is little the UK can do to directly reduce these costs, as they are driven by the impact of global climate change, and so by how much major global emitters reduce their emissions over the coming decades.

The 2025 report brings us closer to capturing the total impact of climate change on the public finances. The combined fiscal impact from both the net zero transition and climate damage amount to an additional 5% of GDP in borrowing and 74% of GDP in debt by the early 2070s in the below 3°C scenario with central investment costs.

The OBR says that these estimates are highly uncertain and sensitive to government choices on the policy levers used to transition to net zero, and to the extent of the economic damage caused by climate change.