Abstract
<jats:p>Climate shocks create a difficult policy problem: an intervention that protects growth can also strain public finances, and these trade-offs are magnified by uncertainty about both the shocks themselves and the macroeconomic model used to assess them. In this paper, a methodology to explore these issues is presented and applied to the management of coastal flood risks in the Maldives. The analysis uses a version of the World Bank MFMod macrostructural model that includes stochastic damages from coastal flood and model uncertainty. It evaluates two policy options (prevention and preparedness) using three metrics: expected GDP losses, the probability that debt exceeds a sustainability threshold, and the probability of a sharp deterioration in the debt ratio. Results show that climate risks are macro-critical in the Maldives and that individual policies create synergies and trade-offs. Investments in prevention are win-win, with gains in GDP enhancing debt sustainability, but only up to a certain level. Beyond a threshold, there is a trade-off between growth and debt sustainability as debt-financed prevention investments worsen debt vulnerabilities in spite of the GDP gains they generate. Preparedness alone (through contingency funds or other instruments) improves fiscal resilience, especially in context of large tail risks. Policy mixes mitigate trade-offs and preparedness and prevention are complement: preparedness enables larger prevention investments without magnifying debt vulnerability, leading to larger GDP gains. Introducing model uncertainty widens the distribution of possible outcomes but does not affect key policy conclusions. The main policy message is that robust climate macrofiscal planning should move beyond expected values and focus on policy mixes that combine prevention and preparedness to manage growth and debt sustainability across a wide range of plausible futures.</jats:p>