The cost of transitioning to a net-zero emissions economy in Cyprus depends heavily on the chosen policy mix, particularly regarding how carbon tax revenues are used, according to research conducted by the Finance Ministry in collaboration with the University of Cyprus’ Economics Research Centre (CypERC).

The findings of this research were published in a European Commission study aimed at assessing macroeconomic and fiscal risks from climate change, drawing on approaches and experiences from member states.

In a post on the social media platform X, the Finance Ministry explained that the commission’s study explores how macroeconomic and fiscal risks stemming from climate change should be addressed.

It takes into account the 2024 amendments to Directive 2011/85/EU on the budgetary frameworks of member states.

The study outlines core concepts, explores potential methodological approaches and available tools, and presents country practices that reflect emerging trends across Europe.

Regarding Cyprus, the study references the three-year research project launched by the Finance Ministry, in cooperation with the University of Cyprus’ Economics Research Centre, focusing on climate change and its implications for the Cypriot economy.

The aim of the Cyprus-based project was to assess the economic and fiscal impacts of climate change across critical sectors, and to analyse how these impacts would affect public debt and the broader development model of the country.

The project forms part of Cyprus’ broader commitment to the goals set out in the European Green Deal and the Fit-for-55 package, as reflected in the country’s revised Integrated National Energy and Climate Plan.

The second phase of the project, which took place in 2024, focused on a model-based assessment of the economic impact of transition policies toward clean energy.

The analysis included multiple scenarios to evaluate the effects of different policy instruments, such as carbon taxation, green subsidies, policy mixes, and tax reforms that shift the burden from income and capital to energy taxation.

“The simulations provide qualitative and quantitative insights into the short and medium-term macroeconomic impacts of these policies, considering key variables such as output, employment, and inflation, as well as their contribution to achieving the Fit-for-55 targets,” the commission stated.

The analysis revealed that the cost of the clean energy transition to net-zero emissions depends significantly on the selected policy mix, and especially on the efficient use of carbon tax revenues.

According to the study, the results have been incorporated into Cyprus’ preliminary annual fiscal plan for 2025 and its medium-term plan for the 2025–2028 period.

The next steps include expanding modelling and analysis to assess the impact of new fiscal tools for addressing climate change, such as clean energy subsidies and green public investment, as well as changes in the expenditure-tax mix.

They also involve examining the effects of monetary policy and short-term stabilisation measures, including inflation and interest rate policy, along with the physical impacts of climate change, such as productivity losses caused by rising temperatures.

What is more, Cyprus plans to integrate this analysis into its economic forecasting processes.

Finally, the commission stated that Cyprus’ Fiscal Council is participating in the ongoing multinational project of the Technical Support Instrument, which supports five independent fiscal institutions in Cyprus, Greece, Latvia, Slovenia, and Spain in incorporating climate-related risks into debt sustainability analysis models.