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      FRIDAY, 26/05/2023 - Scope Ratings GmbH
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      Spain’s environmental governance challenge: regional elections take place amid rising climate risk

      Spain is among the most environmentally exposed EU countries, needing to invest heavily to enhance climate resilience and meet climate commitments, but upcoming regional elections could complicate coordination of local, regional and national policies.

      By Jakob Suwalski, Senior Director and Thibault Vasse, Associate Director, Sovereign Ratings

      The outcome of this Sunday’s elections in 12 of Spain’s 17 regions will test the country’s decentralised environmental policy, with potentially adverse consequences for environmental outcomes and long-term credit quality if the country’s political landscape becomes more rather than less fragmented.

      Green investments can bolster economic resilience against climate risks, create new job opportunities, and yield long-term cost savings through sustainable practices.

      However, the initial costs and potential financial strain, coupled with higher interest rates and uncertain returns on investment, pose challenges for regional governments, requiring careful financial management to ensure the positive impact outweighs the associated risks. The issues are particularly acute in Spain given the acute environmental challenges the country faces (Figure 1).

      Regional budgets will need to adjust to rising green investment needs. The country’s latest National Climate and Energy Plans foresee total investments of EUR 241bn (17% of 2022 GDP) over 2021-30 to meet Spain’s climate commitments, 20% of which are public investments. Investments needs will likely rise with this year’s update of member states climate plans in line with more ambitious climate targets under the EU’s Fit for 55 plan.

      Figure 1. Regional exposure to climate change risks across EU countries
      Index scores (1 = least exposed; 2 = most exposed)


      Note: Index scores, for NUTS3-classified regions, consider the combination of hazard, exposure and vulnerability to the potential effects of climate change. Source: ESPON, Scope Ratings

      Some Spanish regions among most exposed in EU to environmental risks

      Several Spanish regions and provinces are among the most environmentally vulnerable in the EU, with rising risks of extreme weather events, such as droughts, heatwaves, and wildfires. Rising sea levels and increased storm intensity could also pose significant risks to Spain’s extensive coastal areas.

      On land, better water management is crucial to avoid shortages, necessitating conservation measures and investment in infrastructure. Environmental challenges are likely to increasingly strain local and central government resources in face of more frequent, severe emergencies and associated recovery spending. Spain’s central government requested emergency funds from the EU in late April to help its agricultural sector face one of the worst droughts in years.

      Spain is also the EU country with the widest regional climate disparities with sharper declines in rainfall hitting the south and more severe water shortages in the southeast for instance.

      Seville, Granada, the Province of Córdoba, Cádiz, and Huelva are the five Spanish mainland provinces estimated by the European Observation Network for Territorial Development and Cohesion (ESPON) to face the highest climate-change risks. Biscay, Soria, Gipuzkoa, Alava, and Melilla are less exposed (Figure 2).

      Figure 2. Regional vulnerability to climate change in Spain – ‘Top 5’ and ‘Bottom 5’
      Index scores (1 = least exposed; 2 = most exposed)


      Note: Index scores, for NUTS3-classified regions, consider the combination of hazard, exposure and vulnerability to the potential effects of climate change. Source: ESPON, Scope Ratings

      Spain’s decentralisation important factor in considering climate policy

      Spain is also one of the most decentralised countries in the EU, especially when it comes to climate action, making effective coordination between the central government and regions even more critical, a challenge highlighted by the International Energy Agency.

      While public climate spending is moderate in Spain relative to other EU countries, at 1.4% of GDP in 2019, the bulk of it (around 80%) is channelled through local and regional budgets (Figure 3), according to OECD data.

      Spanish regions and some large municipalities developed action plans from as early as 2002 to increase climate resilience and implement sustainable practices across sectors with associated investments in resilient infrastructure, including transportation networks and water-saving technologies, in addition to promoting responsible water use. Several regions such as Andalusia or Catalonia have also adopted green budgeting practices.

      The financing context has changed in the past 18 months. Higher interest rates could exert pressure on the financials of the Spanish regions sector in the near-to-medium term, particularly concerning investments.

      Nonetheless, the sector's improved budgetary outlook, driven by robust revenue growth and substantial EU funding support, will help mitigate these challenges.

      Figure 3. General government and Regional and Local public climate spending (% of GDP)

      Note: Subnational climate spending for unitary countries is aggregated under ‘Subnational’.
      Source: OECD, Scope Ratings

      Decisive climate action at regional and local level will be crucial to avoid severe long-term climate risks that would otherwise have adverse and highly heterogeneous effects on the credit quality of Spanish regions and the sovereign, but much depends on the outcome of the 28 May elections and national elections later in the year – with the possibility that further political fragmentation complicates coordinated policy making.

      Rising risks of extreme weather events and environmental challenges have the potential to strain regional and central government resources, requiring careful financial management to ensure the positive impact of green investments outweighs associated risks.

      Scope rates a number of Spanish regions on a subscription basis (see ScopeOne). Find more detailed analysis on the sector in our recent research report (publicly available): “Spanish Autonomous Communities – Sector Outlook 2023”.

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