Climate Disasters and Intergenerational Equity: A Fiscal Rule for Sustainable Development

Harrison Hong, Heqing Huang and Neng Wang

No 34916, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Climate disasters threaten intergenerational equity by exposing future generations to rising risks. We develop a model in which a government learns about disaster risk and enforces a sustainability criterion requiring expected social welfare to be non-decreasing over time. This criterion—similar to the principle underlying the UN Sustainable Development Goals—can be decentralized through state-contingent fiscal instruments: when perceived disaster risk is high, the constraint binds and government raises a consumption tax to finance investment subsidies for resilience. Such a fiscal rule leads to intergenerational-welfare smoothing and improves asset valuations despite adverse climate news due to commitments to future resilience. Compared with a government that adopts a social discount rate lower than households’, the sustainability-constraint rule responds to disaster risk and is better aligned with observed consumption-based climate-resilience taxes, such as those implemented in Greece and Spain.

JEL-codes: E20 G01 H56 (search for similar items in EconPapers)
Date: 2026-02
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