[January 27, 2026] As climate disasters grow more frequent and severe, governments around the world face a difficult question: how can today’s policy decisions protect future generations without placing an excessive burden on current ones? That challenge was the focus of a recent paper co-authored by Wang Neng, CKGSB Dean’s Distinguished Chair Professor of Finance and Senior Associate Dean, which was presented and discussed at an online academic seminar hosted by Cheung Kong Graduate School of Business (CKGSB) on January 27, 2026.
The study, entitled “Climate Disasters and Intergenerational Equity: A Fiscal Rule for Sustainable Development,” develops a rigorous framework showing how governments can design state-contingent fiscal policies—such as temporary consumption-based sustainability taxes that fund climate-resilience investment—to ensure that economic welfare does not decline over time.
“Climate disasters threaten intergenerational equity by exposing future generations to rising risks,” Professor Wang and his co-authors write in the paper, highlighting the growing imbalance between today’s consumption and tomorrow’s vulnerability.
The research bridges economic theory and public policy by translating long-standing sustainability principles—key to the United Nations Sustainable Development Goals (SDGs)—into a concrete fiscal rule. Rather than relying on fixed deficit limits or permanently higher taxes, the authors propose a sustainability-based fiscal approach that adjusts automatically as climate risk evolves.
When perceived disaster risk is low, governments do not need to intervene fiscally. But when climate risks rise—after extreme weather events, for example—the rule calls for higher consumption taxes, with revenues explicitly directed toward investment in climate resilience and adaptation.
“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,” Professor Wang explains. This rule ensures that future generations are not made worse off by today’s decisions, while avoiding large, permanent distortions to economic activity.
One striking implication of the research is its explanation for a counterintuitive real-world phenomenon: in some countries, financial markets have responded positively to the introduction of climate-resilience taxes.
According to the model, credible commitments to future resilience investment can actually raise asset valuations, even when climate risks worsen. “Such a fiscal rule leads to intergenerational-welfare smoothing and improves asset valuations despite adverse climate news due to commitments to future resilience,” notes Professor Wang. “Our framework allows governments to use asset-market indicators to assess whether earmarked resilience investments are credibly implemented.”
This mechanism helps explain observed market reactions following the adoption of climate-resilience levies in countries such as Greece and Spain, where revenues are earmarked for disaster preparedness and adaptation.
The study also compares the sustainability approach with a more traditional policy idea: lowering the social discount rate to place greater weight on future welfare. While popular in climate-economics debates, that approach, the authors argue, often leads to uniformly high taxes that are insensitive to actual climate risk and politically difficult to sustain.
By contrast, the sustainability-based rule provides a practical benchmark for fiscal authorities and international institutions to evaluate whether national climate policies maintain or erode intergenerational welfare.
For policymakers, the research offers a practical roadmap. Consumption-based sustainability taxes can be designed to rise only when needed, remain transparent to citizens, and be evaluated using real-time market indicators such as asset prices or sustainability bond spreads.
More broadly, the study suggests that climate policy need not be a trade-off between short-term economic efficiency and long-term fairness. Well-designed, risk-contingent fiscal rules can achieve both.
The paper is co-authored by Harrison Hong (Columbia University and NBER), Heqing Huang (National University of Singapore), and Neng Wang (Cheung Kong Graduate School of Business).
