OECD Economic Surveys: Hungary 2026

2. Adapting to climate change while pursuing mitigation efforts

Michaël Sicsic

Abstract

Despite declining greenhouse gas emissions in the energy and manufacturing sectors and a rapid expansion of the production of solar energy, decarbonisation needs to accelerate to meet emission targets and improve energy security. This will require scaling up the supply of wind energy, lifting grid constraints, and cutting emissions in the transport and residential sectors, the two largest sources of emissions, including by raising carbon pricing. As Hungary is highly exposed to floods, droughts, and extreme heat waves, and the expected economic losses are among the highest in the region, the adaptation measures already taken need to be continued and expanded. Further improvements in insurance coverage in high-risk areas will be key and probably require the creation of a government-backed reinsurance mechanism and a natural disaster relief fund. This must go hand in hand with better awareness of climate risks, prevention and enforcement of land-use regulations. Private investments in climate risk mitigation are increasing steadily but remain relatively low. Insurance pricing and targeted public support, including for relocating people living in high-risk areas, would provide incentives to improve the situation. Mainstreaming climate adaptation in fiscal planning will also be critical to ensure sufficient funding for investment in resilient infrastructure.

2.1. Climate change mitigation efforts are progressing but need to accelerate

Climate mitigation action and investment in clean infrastructure are key for reaching climate neutrality by 2050. In addition, they can deliver gains in energy security, health, and jobs (OECD, 2025[1]). This section provides an update on greenhouse gas (GHG) emissions mitigation efforts undertaken by Hungary since the last Economic Survey (OECD, 2024[2]) with a focus on the two main sources of GHG emissions.

2.1.1. Decarbonisation needs to accelerate

Hungary’s Clean Development Strategy (NCDS) sets the long-term strategy of achieving net zero emissions by 2050 while the National Energy and Climate Plan (NECP) operationalises this through policies and scenarios, targeting a 50% reduction in GHG emissions by 2030 compared to 1990. Hungary’s efforts are progressing towards these targets. Hungary has reduced its GHG emissions (including those related to land use, land-use change and forestry) by 47% between 1990 and 2023, while GDP has increased by 80% over the same period, a significant decoupling of emissions from growth. GHG emissions are relatively low compared to other OECD countries. Emissions per capita reached 5 tonnes of CO₂ equivalent in 2023, below the EU and OECD averages (7 and 10 t of CO₂ eq., respectively), but achieving the net zero emissions by 2050 will be challenging. Over the last decade, emissions have stagnated because gains in energy and manufacturing industries have been offset by rising transport emissions (+69% since 1990 despite improvement since 2023) and stagnant residential emissions, now the two largest sources of emissions (Figure 2.1, Panel A).

While emission reduction exceeds 50% since 2005 in sectors currently covered by the EU Emission Trading System (ETS), progress lags behind in other sectors (domestic transport, buildings, agriculture, small industry, and waste). In those sectors, existing policies would only deliver a 11% reduction in 2030 according to NECP, below the 18.7% EU reduction objective. The reliance on yet-to-be-implemented measures in those sectors introduces uncertainty about achieving future GHG emission reduction targets.

Most emission reductions achieved so far are related to energy efficiency gains (Figure 2.1, Panel B). While energy use per unit of GDP has halved since 2000, the carbon intensity of energy use has declined by only 29%, less than in Czechia and Estonia for instance. The carbon intensity of energy supply in Hungary remained far above the EU average in 2023 (European Parliament, 2025[3]). This shows that, in addition to improving energy efficiency, accelerating the shift to low-carbon energy sources will be essential.

Figure 2.1. Net GHG emissions have decoupled from growth but progress has stalled recently

Note: In Panel A, total GHG emissions include emissions from LULUCF (Land Use, Land Use Change and Forestry), and the “Other” category includes emissions from agriculture, waste, and other energy. In Panel B, TES is Total Energy Supplied. Changes in CO2 emissions are broken down into contributions from population growth, GDP per capita growth, and changes in energy intensity and emission intensity of energy (emissions per unit of energy use). Total emissions = Population × (GDP / Population) × (Total energy consumption / GDP) × (Total emissions / Total energy consumption).

Source: OECD (2026), OECD Environment Statistics (database); OECD Demography and Population Statistics (database); OECD National Accounts Database; and IEA (2025), CO2 Emissions from Fuel Combustion Statistics Database.

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2.1.2. Expanding renewable energy supply

Hungary remains highly dependent on energy imports (see Box 2.1), creating risks to energy security. Nuclear energy can help reduce the dependency on fossil fuel imports, while contributing to lower carbon emissions, but this will take time: the commissioning date of the new nuclear plant that is currently in construction (Paks 2) is highly uncertain (OECD, 2024[2]). Hungary is trying to extend the lifetime of its existing nuclear plant (Paks 1) and has reached agreements to buy nuclear fuel outside Russia. While this is a safe strategy, the costs of extending Paks 1 and constructing Paks 2 should be closely monitored as they are likely to put additional pressure on public finances. It is important for nuclear projects to be underpinned by transparent and comprehensive life-cycle cost-benefit analyses that inter alia account for the cost of constructing power plants, storing radioactive waste, and decommissioning disused power plants. The phasing-out of coal-based electricity generation is planned for 2029 but depends on the timely replacement of the existing units with modern, carbon-saving and efficient capacity at the Matra power plant.

Box 2.1. Hungary remains highly dependent on energy imports

Oil and natural gas dominate the energy mix and are mostly imported (at three-quarters from Russia), leaving Hungary exposed to global price shocks and creating challenges for energy security (Figure 2.2, Panel A). In 2024, energy imports remained around the same level as in 2010 but diversification efforts have intensified recently. Domestic production of gas and oil has increased recently, gas interconnections have been established with six out of seven neighbouring countries, which include the TurkStream pipeline that connects Serbia with Hungary and bypasses Ukraine. Moreover, LNG imports by sea via Croatia have intensified, and natural gas underground reserves have increased to cover up to 75% of annual consumption. Hungary's national energy strategy sets a goal of reducing the gas import ratio to around 70% by 2030 through increase in domestic supply and demand reduction. Import gas reduction could be more ambitious and align with REPowerEU target (over 50%). Further diversifying gas imports is also critical as Hungary would face the highest GDP losses (up to 4%) from an EU-wide Russian natural gas cutoff (Di Bella et al., 2024[4]). Domestic electricity generation largely depends on nuclear energy (42%), followed by renewable sources (26%), mainly solar PV (Figure 2.2, Panel B).

Figure 2.2. High dependence on imported energy and low share of renewables

Note: Panel A considers net imports, defined as gross imports minus exports. Other renewables include hydro, solar, wind and geothermal energy. Due to data limitations, net electricity imports in Panel A cannot be broken down by primary energy source.

Source: International Energy Agency (IEA), OECD calculations.

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In this context, developing renewable energy production appears the fastest option to both reach low carbon emissions and improve energy security. Hungary aims to achieve a 90% low-carbon electricity mix by 2030 compared to 75% in 2024, requiring deeper investment. Solar capacity has expanded rapidly in the last decade, providing close to one quarter of electricity generation, one of the largest shares in the world (EMBER, 2025[5]). Nevertheless, renewables only cover 18% of gross energy use, much below the 30% NECP target by 2030 and the EU recommendation of 34% (EC, 2025[6]). Hungary should diversify renewables and transpose the EU Renewable Energy Directive into national legislation to speed up its development. Hungary's Recovery and Resilience Plan may now receive substantial EU financing following a recent political agreement on the release of EU funds, which could support renewable expansion and energy efficiency. RRF-supported investments are estimated to reduce Hungary's emissions by around 0.5% annually, with reform-related savings concentrated in renewable energy (93%) (Caprini and Studtrucker, 2026[7]).

Restrictive rules have impeded the development of wind energy until recently. Regulations were finally eased in 2024, by reducing the minimum distance between windmills and settlements from 12km to 700m (Table 2.1). In order to speed up permit granting procedures and reach the 1 GW wind power capacity target, Hungary could introduce digital platforms (like in Greece), one-stop shops and simple procedures (like in France and Portugal), “silence is consent” rules (like in Finland and Lithuania) (EC, 2024[8]) (OECD, 2025[9]).

Despite a fourfold increase in production since 2010, Hungary has a single geothermal power plant and significant untapped geothermal potential (European Parliament, 2025[3]). Recent reforms such as a one-stop shop system launched in 2023, streamlined licensing, and the national geothermal strategy will support investment (OECD, 2024[10]). These supply-side efforts should continue, but demand should also be supported by expanding agricultural applications and geothermal water heating for municipalities. The recent completion of the EU’s largest geothermal district heating system in Szeged is a welcome step.

The intermittency of wind and solar energy sources calls for greater investment in the electricity grid, in storage capacities and in flexible demand systems. Grid development plans fall short of projected solar and wind power needs in 2030 (EMBER, 2024[11]), despite EU-funded investments. Grid expansion faces higher costs and more administrative hurdles than in most EU countries (RES, 2024[12]). If EU and government financing proves insufficient to cover operating costs and investment needs in the electricity grid, grid fees may need to rise and connection tariffs introduced for energy generators, as in Romania and Austria. Scaling up smart grids and energy storage capacity will be critical to support renewables integration and optimise electricity use. Solar energy oversupply in the first half of 2025 highlights the urgent need to accelerate storage deployment. Hungary’s current battery programmes (including the Napenergia Plusz Programme and the new HUF 100 billion tender for residential solar energy storage) and the new storage system in Százhalombatta are positive steps towards the NECP target of 1 GWh (Ministry of energy, 2024[13]), close to the optimal level given Hungary’s renewables target (Kácsor, Mezősi and Szabó, 2025[14]). Accelerating the dynamic retail pricing development could incentivise consumers to install smart meters to reach earlier the one million target.

2.1.3. Reducing emissions from the transport and residential sectors

Transport is now Hungary’s main source of emissions, driven by an old car stock, a moderate price of motor fuels, and urban sprawl. Transport energy intensity has risen since 2000, probably due to the rising average age of the car stock, which reached 16 years in 2025, and a consistently low level of renewable motor fuels and electricity (9% in 2023, much below Hungary’s NECP target of 25% by 2030). Reducing transport emissions will require additional policies to encourage the renewal and the electrification of the car stock, deter the use of cars whenever possible, improve the quality and greening of public transport, and limit urban sprawl.

Stronger price signals will be key to cut transport emissions, by encouraging the purchase of low-emission vehicles and changes in transportation habits. Carbon prices in the Hungarian transport sector are among the lowest in the OECD (Figure 2.3, Panel A). This is due to lower tax excises on fuels and several fossil fuel subsidies, including excise tax refunds for agriculture, railways and inland waterways. Tax exemptions for reimbursement of commuting expenses also encourage car use. Despite a 4.1% rise in 2025, fuel excise taxes are still one of the lowest in Europe and gasoline prices were 10% below the EU average in mid-2025.

Only 58% of Hungary’s emissions are subject to a positive carbon price, compared to 80% in the Netherlands, the OECD top performer in this area. The carbon tax that was introduced in July 2023 will only apply to firms receiving free ETS allowances, which does not (yet) concern the transport sector. Expanding carbon pricing in this sector would help reduce emissions and prepare Hungary for the transition to ETS2 planned in 2028, which will include the transport and building sectors in addition to ETS sectors. Reducing fossil fuel subsidies and the tax exemptions for reimbursement of commuting expenses would also be an important step but might be not enough. Introducing a carbon tax that applies to all sectors based on their CO₂ emissions or an anticipated ETS2 scheme as in Germany and Austria since early 2025 should be considered. While a carbon tax is the most effective tool to cut emissions in transport according to a recent literature review (OECD, 2025[15]) there is a strong academic support for redistributing the related revenues to secure political acceptability (Dechezleprêtre et al., 2025[16]). Switzerland is one example where most revenues from carbon pricing are redistributed to the private sector. Hungary could adopt a similar approach, directing additional revenues from stronger carbon pricing to support vulnerable households and finance adaptation investments, thereby enhancing equity and the credibility of reform.

Greening Hungary’s transport sector requires a faster renewal and electrification of the car stock. So far, the uptake of electric vehicles (EVs) in Hungary remains low, at 2.2% of the vehicle fleet at the end of 2024. Beyond increasing carbon prices on fuels, fiscal support for the purchase and use of EVs can be motivated by the fact that using zero-emission EVs has a positive external effect that is not internalised by individual users when choosing their motor vehicle. To maximise cost-effectiveness, fiscal support needs to be carefully calibrated. This starts with the financing of an adequate public charging infrastructure. Hungary’s charging infrastructure (0.5 charging point per thousand inhabitants) is lagging behind among European countries, which may create bottlenecks (ACEA, 2024[17]). Nevertheless, several support programmes have been put in place to improve the situation. Prioritising fast charging stations along main traffic corridors is important to connect cities and encourage the use of EVs over longer distances.

To raise adoption, Hungary has also introduced EV purchase subsidies. They amount to just over EUR 7,000 in 2024, close to the EU average, and should be regularly evaluated for their effectiveness and revised as needed, based on purchase prices and the lifecycle costs of electric and non-electric vehicles. From September 2024, only battery-electric and zero-emission vehicles will qualify for green licence advantages in Hungary (e.g. free parking), which is welcome. Hungary could also consider a social leasing mechanism whereby subsidised long-term EV rental contracts benefit lower-income households, as in France. Beyond increasing EV affordability, this would contribute to the development of a second-hand EV market. Company fleets are another lever to support EV uptake. While Hungary has launched subsidy schemes for corporate EV purchases, it could require large fleet operators to include EVs in employee car options, as in France where 40% of large corporate fleet acquisitions will have to be electric by 2027. This would also help increase visibility on demand for carmakers.

As the renewal of the car stock takes time, changes in transportation habits can also have a significant and immediate impact on transport emissions. Information campaigns are key to reduce inefficient car use. Hungary could launch an eco-driving information campaign and diffuse apps to promote fuel-saving driving. Insurance also has a role to play to reward green driving and car moderation, including by moving from the current unlimited mileage insurance policies to pay-per-kilometre insurance schemes to incentivise drivers to reduce mileage (Chassang, 2025[18]), but such schemes are not widespread. As car insurance is relatively cheap in Hungary, this does not leave much space for rewarding occasional drivers. Reducing the cost of on-board units to measure distance driven, e.g. with smartphone-based telematics, would help develop pay-per-kilometre insurance schemes. In any case, stronger incentives from insurers must go hand-in-hand with improved public transport provision to ensure their effectiveness.

Despite a dense rail network in Hungary, train usage only represented 10% of passenger transport in 2023 (Eurostat, 2025[19]). Developing road and rail interconnections, including park-and-ride facilities, while raising parking and congestion fees in city centres would support the development of this transport mode (OECD, 2024[2]). As less than half of the rail network is currently electrified and only 25% in rural areas (Tóth, 2025[20]), further electrifying it would also reduce emissions. Road public transport investments have started to increase recently, with the Green Bus Programme, the co-financing of diesel bus replacements with electric ones, and the development of electric chargers along the main roads. While such initiatives are welcome, formal cost-benefit analysis is insufficiently used for investments in infrastructure projects (Chapter 1), and market regulations hinder the entry of new firms in the transport sector, which may slow down the renewal of the fleet.

Incentivising urban densification is also essential to reduce transport emissions. Recurrent property taxes have a role to play to encourage greater urban densities (OECD, 2022[21]), including by strengthening local authorities’ incentives to reduce inefficient constraints on dwelling constructions, such as height limits (Dougherty and Kim, 2023[22]). This could be done by increasing the property tax rate and improving the assessment of property values. Hungary could strengthen and broaden the land tax in priority, which is optimal and only raised by 18% of municipalities (Chapter 1).

Figure 2.3. Energy prices in the transport and building sectors are low

Note: In Panel A, the Effective Carbon Rate (ECR) is the sum of fuel excise taxes, carbon taxes and tradeable permits that effectively put a price on carbon emissions. Data are expressed at 2023 constant prices. In Panel B, data on annual consumption refers to medium-sized consumers with their consumption between 20 and 200 Gigajoules.

Source: OECD (2025), Net effective carbon rates (database); and Eurostat (2026), Energy Statistics.

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Hungary’s housing stock is among the least energy-efficient in the EU (OECD, 2024[2]), with only 12% of buildings rated B or above in 2022 (MNB, 2023[23]). Despite multiple renovation programmes and a National Building Renovation Plan launched in 2025, reaching the target of 90% of nearly zero-energy buildings by 2050 will be challenging. There are two main levers that Hungary can use to accelerate dwelling renovations: ensuring that energy prices provide the right incentives and streamlining the existing renovation support schemes.

Energy price signals weaken incentives for renovation. Hungary maintains some of the lowest household gas and electricity energy prices in Europe (Figure 2.3, Panel B), largely due to existing price caps (Table 2.1). Limiting the price cap to the part of household consumption that is below the national average from 2022 onwards and the 10% excise increase on heating fuels in 2025 were steps in the right direction, but many subsidies remain for natural gas and electricity through tax expenditures and direct transfers. These fossil-fuel subsidies weaken incentives to reduce energy consumption, invest in energy efficiency and adopt cleaner technologies. This also has major fiscal costs (close to 2% of GDP per year over 2022-2024 for the energy price cap, and 3.5% of GDP in 2022 for all fossil fuel subsidies) and is regressive (OECD, 2024[2]). As the reform of the price cap on heating fuels in 2022 triggered a surge in insulation and renewable heating investments (Csoknyai et al., 2022[24]), Hungary should build on this momentum by gradually phasing out price controls and fossil fuel subsidies and redirecting funds toward targeted support for vulnerable households. Public support for building renovation (see below) should complement the price signal, not replace it. The number of new renovations undertaken could be even higher with an improved energy support scheme.

Many different schemes are available to encourage home renovation in Hungary. The energy efficiency obligation scheme for energy suppliers (EEOS) is an effective policy instrument, allowing the renovation of 50,000 household dwellings in 2025. Several other public support schemes seem to partly overlap and are poorly targeted to the least efficient housing, including the Home Renovation Programme, the updated Rural Renovation scheme (with limited success), the Green Housing Loans and various loans targeting nearly-zero energy (NZE) buildings, the Rural CSOK, the SZÉP Card for Home Renovation, the Jedlik Ányos Energy Program, and employer-provided housing support with tax benefits. General renovation subsidies can generate significant deadweight losses (Fowlie, Greenstone and Wolfram, 2018[25]) and renovations show greater savings in the least efficient housing (Baba Moussa et al., 2025[26]). At the same time, high upfront costs, low awareness, and co-financing rules can limit renovation. In this context, streamlining the available support schemes by prioritising the retrofitting of the least efficient housing units and the households most in need, and adjusting subsidies to the actual energy efficiency gains will be key.

Energy Performance Certificates (EPCs) are an effective tool to pilot and encourage building renovation (OECD, 2025[15]). While recent reforms make certification mandatory for newly built, transacted and rented residential dwellings, coverage remains low. Hungary should aim for universal certification of the dwelling stock and increase enforcement to provide consumers with clear information. It should also remove the price cap on EPCs which is set too low and results in lower quality EPCs (Jenei, 2020[27]). For multifamily housing, split incentives remain a barrier: relaxing voting rules for renovations would help unlock investments.

Table 2.1. Past OECD policy recommendations on climate change mitigation and actions taken

Main OECD recommendations	Actions taken since the 2024 Survey or planned
Restructure energy support by moving from price caps to more targeted cash transfers to support vulnerable households.	Since 2022, the price cap has been limited to the part of consumption below a certain threshold. New support schemes were introduced.
Enforce emission reductions through a mix of regulations and carbon prices, and progressively align carbon prices in sectors outside of emissions trading to those in the EU-ETS.	The EU-wide voluntary framework for the certification of carbon capture, management and storage across Europe entered into force at the end of 2024.
Raise excise taxes on petrol and diesel.	Introduction in 2025 of an annual automatic inflation-based indexation of excise duties, including those on petrol and diesel
Remove restrictive rules on windmill installation, particularly the distance to housing rules.	The minimum distance has been reduced from 12km to 700m and further deregulation is expected in ‘go-to’ areas for wind capacity.
Allow the grid operator to raise fees to cover operating costs and investment needs if EU and government financing is insufficient.	Substantial state sources have been allocated to grid modernisation investments and are still planned to be rolled out in 2026.

2.2. Scaling up adaptation to climate change

Average temperatures in Hungary have increased by 0.3°C more than the world average since the beginning of the last century (MIT-HUN, 2020[28]). Looking forward, global warming is now likely to overshoot the Paris Agreement’s 1.5^°C target, despite current mitigation efforts (OECD, 2025[1]). In this context, Hungary needs to prepare for significant climate change. Extreme weather events and climate-related hazards impact economies through various channels, including reductions in demand from lost capital and lower investment due to uncertainty, production and supply chain disruptions, and reduced labour productivity (OECD, 2024[29]) (Costa et al., 2024[30]). Recent estimates indicate that future climate damages could be significantly larger than previously thought (Bilal and Känzig, 2024[31]). Adaptation investments are essential to ensure sustainable development and they typically have a high return (Hong, Ng and Xu, 2025[32]). Up to 95% of Hungarians recognise the need to adapt to climate change (EIB, 2024[33]). However, despite recent improvement and the launch of the National Adaptation Strategy in the second National Climate Change Strategy (NCCS-2), Hungary’s overall capacity to recover from disasters linked to its institutional framework is low compared to the OECD average (IASC/EC, 2025[34]).

2.2.1. Floods, droughts and exposure to extreme temperatures are the main climate-related risks for Hungary

About 14% of land and 22% of the population are exposed to a decennial river flooding, among the highest in the OECD, with large differences across regions (Figure 2.4, Panel A-C). While only 5% of the population is exposed to floods in the Northwest (Central Transdanubia), this share goes up to 43% in the Southeast (Southern Great Plains). Flash floods can happen, but river overflowing is the main identified risk for Hungary, arising from the Tisza and Danube rivers. Excessive inland water is also a significant risk, particularly for the eastern part of the country (KSH, 2024), while storms can cause significant damages.

Figure 2.4. Hungary is very exposed to flooding and extreme temperature risks

Note: Panel A and C consider the exposure to a flood risk that materialises every 10 years on average. The indicator in Panel B and D measures the share of the population exposed to days where the daily maximum temperature exceeds 32°C and the minimum temperature at night exceeds 20°C. Population-weighted number of hot days and tropical nights reflects the average number of hot days and tropical nights experienced per person.

These panels do not account for the most recent investments aimed at mitigating river flooding and extreme temperature risks.

Source: OECD (2025), “Climate-related hazards: Historical exposure to extreme temperature”, OECD Environment Statistics.

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A third of the land area, mainly in the Eastern part of the country, and 18% of the population are subject to drought risks (OECD, 2023[35]), which makes Hungary the 16^th most exposed country to droughts globally (UN Convention to Combat Desertification). Hungary’s vulnerability to droughts is further exacerbated by the fact that the country is located in an enclosed basin (Carpathian Basin) and almost 95% of the rivers come from abroad. Droughts decrease the water retention capacity of soils, leading to erosion, soil degradation, and reduced soil fertility. The number of days with precipitation decreased by 32% between 1901 and 2020, implying longer dry periods. Compared to the 1981-2010 average, soil moisture was 10% lower in 2024. As more than half of Hungary is covered by utilised agricultural area, one of the largest proportions in the OECD, droughts are a major risk for agriculture. Beyond climate change, current water resource management practices causing inefficient water use (water losses reaching 25%) and over-abstraction also contribute to increased drought risks (OECD, 2020[36]), despite recent improvements in water management.

Finally, 90% of the Hungarian population is exposed to extreme-heat days, one of the highest proportions in the OECD (Figure 2.4, Panel B). The number of hot days and tropical nights is especially high in Southeast Hungary (Figure 2.4, Panel D) and is projected to increase significantly, as well as their intensity. The Carpathian Basin, and Hungary in particular, is among Europe’s most exposed regions to rising temperature extremes in the future (MIT-HUN, 2020[28]).

Looking ahead, summer precipitation could decrease by up to 20% by 2100, further increasing the drought risk. The number of drought days, defined as consecutive days with less than 1 mm of precipitation, is projected to increase by 3-20 days (OECD, 2023[35]). At the same time, autumn precipitation may increase by 15%, further increasing the flooding risk. The Southern and Eastern regions are projected to become more exposed to drought and heat waves (Figure 2.5, Panel B), while mountainous and hilly areas in the North and the Southwest face a growing risk of flash floods.

2.2.2. Economic costs related to climate change are rising

In Hungary, climate-related risks have already caused cumulated economic losses of 6.2% of GDP since 1980, over 0.1% per year, a high amount compared to other European countries (Figure 2.5, Panel A). River floods account for a large part of these losses, due to major floods along the Tisza River (in 1998, 1999, 2000, 2006, and 2010) and the Danube (in 2002, 2006, 2013, and 2024). The 1999 and 2010 floods alone caused damages to infrastructure, settlements, and agricultural lands worth 2.5-3 % of GDP according to Swiss Re and the European Environment Agency (EEA). Nevertheless, Hungary showed resilience during the 2024 floods in Central Europe, partly due to past investments in flood protection infrastructure.

Figure 2.5. Economic losses and fatalities caused by natural disasters are high

Note: Panel A: Cumulated economic losses between 1980 and 2024 from weather- and climate-related event, at constant 2024 prices, as a percentage of 2024 GDP. Panel B: forecast of the National Adaptation Strategy.

Source: European Environment Agency (2025), RiskLayer CATDAT dataset, Eurostat (GDP); Hungary's Second National Adaptation Strategy 2018-2030 with an outlook to 2050 (Laws and Parliamentary Resolutions, https://mkogy.jogtar.hu/jogszabaly?docid=A18H0023.OGY).

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Damages related to droughts have recently increased, partly due to the shift towards water intensive arable crops. Only in 2022, the direct material loss due to drought exceeded 1.5% of GDP (OECD, 2023[35]). The significant groundwater decline is estimated to have caused 12% maize yield loss over 1986–2010 compared to 1961–1985 (Pinke et al., 2020[37]). Droughts and water scarcity can also impact the energy sector, in particular the Paks nuclear power plant which requires 3 billion m3 of cooling water per year and had to be slowed down due to the increased temperature of the Danube on several occasions over the last summers.

Hungary is projected to continue warming faster than the global average, with average temperatures increasing between 1.6 and 4°C by 2100 compared to 1961-1990 (Government of Hungary, 2024[38]). Extremely hot days are projected to more than double over the same period, causing increasing excess mortality (Figure 2.5, Panel B) and losses in agriculture. The economic costs related to future droughts and floods would be high (Table 2.2): annual damage costs of repeated floods would be around 0.5% of GDP, while severe droughts would lower GDP by 4%-7% and severe floods by close to 8% in the short term and 2.5% after 5 years, reflecting delayed capital rebuilding and financial effects. According to the long-term climate stress test of the Hungarian banking system, in case of a failed transition scenario, Hungary’s GDP would be 4.3 % lower due to the physical consequences of climate change by 2050 (Bokor, 2022[39]). According to the Network for Greening the Financial System (NGFS), a coalition of central banks and financial supervisors, Hungary would face higher direct costs and total losses than neighbouring countries (Figure 2.6, Panel B). Floods would cause significant capital losses, especially in goods-producing industries and critical sectors such as energy supply. Droughts and heatwaves would negatively affect productivity, especially in the agriculture sector. Hungary would be the most affected country by future river floods in Europe with Latvia (Koks et al., 2019[40]).

Table 2.2. Potential economic impact of projected climate change in Hungary

Source	Direct damages	Total economic impact	Scenario
(Koks et al., 2019[40])	0.2%-1% of GDP annually	0.4%-1.2% of GDP annually	River floods
(Dottori, 2020[41])	0.5% of GDP annually		River floods, 2°C global warming scenario
(Boffo et al., 2024[42])		4%-7% of GDP	Severe drought (different scenarios)
(NGFS, 2025[43]), OECD estimates	2% of total capital for flood (see Figure 2.6)	8% of GDP after 2 years; 2.5% of GDP after 5 years;	Disasters & Policy Stagnation scenario. 50 years disaster. See Figure 2.6
(Pollner, 2012[44])	4.6% of GDP		100-year flood
(Amendola et al., 2013[45]).	0.5-0.7% of GDP in each main region		100-year flood, in the regions Western Transdanubia and Southern Great Plains
(Bokor, 2022[39])		4.3% of GDP by 2050	Failed transition. Long term impact.

Source: (Koks et al., 2019[40]) (Dottori, 2020[41]) (Boffo et al., 2024[42]) (Pollner, 2012[44]) (Amendola et al., 2013[45]) (NGFS, 2025[43]).

Figure 2.6. The potential impact of climate disasters is higher than in neighbouring countries

Note: The Figure shows the difference between the Baseline scenario and the “Disasters & Policy Stagnation” (DAPS) scenario. Panel A shows average impacts of a potential drought occurring in 2026, followed by a river flood in 2027, under the DAPS scenario, with losses weighted by each sector’s (50 different sectors) share of 2030 production. These direct (“first-round”) effects draw on hazard intensities and empirically calibrated vulnerability functions. Panel B presents the resulting difference in GDP levels indexed to 100 in 2025, capturing indirect (“second-round”) macro-financial effects.

Source: NGFS (2025), Short-Term Climate Scenarios Technical Documentation; and IIASA Scenario Explorer database (accessed May 2025).

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2.2.3. Scaling up awareness and prevention to reduce exposure

Environmental amenities such as riverbanks often lead people to underestimate local climate risks, especially as awareness of climate change impacts remains limited. This contributes to the rising cost of natural disasters, driven by increasing population and asset exposure (Hallegatte, 2012[46]).

Climate risk information helps guide residential and business location choices. It is a public good which should be made available at the local level, using indicators of exposure and vulnerability (OECD, 2023[47]). Local information on climate-related risks in Hungary should be strengthened. Currently, detailed maps on flood and drought risks are not systematically used. The National Adaptation Geo-Information System (NAGiS) includes vulnerability indicators for different climate risks at a granular level and different horizons (current period, 2040-2071 and 2071-2100), but regularly updating the underlying data in the system would require additional resources, and river flooding is not included yet. The National Flood Risk Management Plan that was adopted in 2015 also features a website; yet, its general hazard and risk maps are not at a granular level, and its documents are complex. The participation of the Hungarian Central Bank in the work initiated by the European Insurance and Occupational Pension Authority (EIOPA) on the development and awareness tool for natural hazard and prevention measures is welcome. It should be pursued and lead to a concrete, user-friendly tool.

In this context, it is hardly surprising that 90% of respondents to a recent survey reported that they did not have access or did not use any quantitative assessment of climate-change risks in support of their organisation’s decision-making (Capela Lourenço et al., 2018[48]). To be more effective, all risk prevention plans should be based on NAGiS data. Moreover, NAGiS should be better tailored to user needs and extended to cover river flooding. NAGiS could be turned into a Monitoring, Reporting, and Evaluation (MRE) tool as in the UK and should be regularly updated as the Slovak system for measuring climate change risk at the local level (OECD, 2023[47]). Continuously updating risk assessments based on the latest climate adaptation investments, and systematically collecting and harmonising data on sectoral vulnerability, will also be important.

Flood and drought risks should be made systematically available to buyers of residential or commercial properties. Providing such information is currently not mandatory in Hungary. Flood and drought risk disclosure would facilitate risk pricing and encourage adaptation investments (Aiba, Hasegawa and Shirai, 2025[49]). It could take the form of maps showing where past natural disasters occurred, or information on compensation paid following such disasters. France and Australia already require sellers and landlords to disclose information on past insurance compensations (OECD, 2016[50]). To ensure that risk assessments are adequately reflected in transaction prices, real-estate agents should be required to present hazard maps or information on past insurance compensations early on in the negotiation between buyers and sellers.

2.2.4. Ensuring adequate insurance coverage

By spreading risks, insurance has a key role to play to limit the overall impact of climate hazards on economic activity, financial stability and public finances (ECB-EIOPA, 2024[51]). Property insurance premia tend to be relatively low in Hungary (Figure 2.7, Panel A) and their share in GDP has decreased since 2013. These low premia and the fact that the typical property insurance contract in Hungary includes a coverage against natural disasters explain why around 70% of Hungarians are insured against flooding risk (Pollner, 2012[44]), Hungary is in the low or mid-zone among European countries regarding the protection gap of natural catastrophe risks (EIOPA, 2024[52]).

Despite relatively high insurance coverage, the share of insured over total losses in Hungary is one of the lowest in the OECD, with estimates varying between 1% and 5% according to different sources (Figure 2.7, Panel B). This reflects a high concentration of risks and costs in non-insured properties, which raises concerns given the relatively high current and projected losses (see above), despite prevention efforts. As climate-risk insurance is voluntary, lower-income households or those expecting government aid in case of disaster can always opt out. Moreover, some insurers tend to exclude properties in areas that are not protected against floods or classified as floodplains, as well as mud-brick constructions (Atreya et al., 2025[53]), leaving many households uninsured in flood-prone zones and in case of inland water damages. Exclusions of the highest risks help to keep premia and reinsurance needs low.

Due to insufficient insurance coverage in high-risk areas, the government had to step in to rebuild uninsured homes after past disasters (e.g. after the 2000 and 2010 floods), even if it had no formal obligation to do so. This fuels moral hazard. To improve the situation, the government created a state-sponsored insurance fund in 2003, which was only available to individual property owners in locations exposed to floods where market-based insurance was not available or too costly. Nevertheless, only around 200 households had subscribed when the government abolished this scheme in 2016 (Slavíková et al., 2019[54]). This low uptake can be explained by insufficient awareness (Atreya et al., 2025[53]).

Figure 2.7. When climate risks materialise, insurance compensation is low

Source: OECD (2024), Global Insurance Market Trends 2024; Swiss Re, sigma (database), all rights reserved.

Statlink

Shifting from ex-post tax-funded disaster relief to an ex-ante catastrophe risk insurance programme could help avoid uninsured losses and reduce fiscal exposure to natural hazards (OECD, 2021[55]). Several policy changes could support this shift. First, making basic flood-risk insurance mandatory or automatically included in all property insurance contracts without exclusions, as in many OECD countries and unlike the previous fund abolished in 2016, would reduce moral hazard and broaden risk pooling. To set up a financial mechanism for the coverage of higher risks, Hungary could draw on international experience and develop a government-backed reinsurance mechanism or a public-private reinsurance mechanism (Box 2.2). A mandatory surcharge on all property insurance premia like in France, Italy, Spain, Iceland, Romania and Belgium could contribute to funding, but should remain affordable. France has created a state-owned reinsurer with unlimited State guarantee to reinsure climate-related risks at an affordable price for insurance companies and households and without direct budget costs. In the UK, a public-private reinsurance scheme called Flood Re was created in 2016 and has improved the availability of insurance coverage for high-risk households.

If the government takes a more active role in the insurance or reinsurance of flood-related risks, provisions should be set aside to avoid unexpected spikes in public spending when risks materialise. This seems particularly important for Hungary where the government may face high borrowing costs (Chapter 1) (OECD, 2022[56]). A National Fund (’Vis Maior Fund’) funded by the general budget aims to support Hungarian local governments to restore the damages caused by natural disasters to municipal properties used for mandatory public services, such as educational or healthcare facilities, but individuals are not entitled to receive support from this Fund. Many OECD countries have created a dedicated natural disaster relief fund to help absorb major shocks without disrupting fiscal planning or crowding out other spending (OECD/WBG, 2019[57]). Some fiscal resources should be allocated to the fund, at least until it reaches a sufficient size. For example, 0.4% of the government budget is allocated each year to Mexico's disaster fund (FONDEN). Since such investments would decrease government exposure to climate-related risks, part of the fund could be used to finance adaptation investments and the relocation of households living in risky areas (see below).

Box 2.2. Institutional arrangements for the coverage of flood disasters in selected countries

Several countries have established specific insurance programmes to ensure that flood and other natural hazard risks are adequately covered, including in high-risk areas.

In some cases, a publicly owned insurance company provides direct insurance coverage. In Spain, such a public insurance called Consorcio de Compensación de Seguros (CCS) covers all “extraordinary risks”. A mandatory surcharge of all insurance premia is allocated to fund the CCS. The government frequently steps in to address disaster-induced fiscal gaps, using emergency lines and budget reallocations. In the US, the National Flood Insurance Program (NFIP) offers federally subsidised insurance to communities adopting flood-management standards, filling gaps left by private insurers. However, this programme has been estimated to spend 40 % of all collected premia on administrative expenses, which probably limits its efficiency (Michel-Kerjan, 2010[58]).

In Australia, France and the United Kingdom, the state plays a role in the reinsurance of flood risks. A similar approach will soon be or have been partially implemented in Canada and Italy (only for firms).

• In the UK, insurers are required to participate in a reinsurance scheme called Flood Re that reinsures high-risk properties and keeps insurance premia affordable in these areas. It is funded through reinsurance premiums collected and a levy on all residential property insurance policies. Coverage is available for homes that were built before 2009 to discourage new development in high-risk areas.

• France’s CATNAT regime mandates natural-risk coverage in all property insurance contracts. It goes beyond flood insurance. Relatively low premia ensure affordability for households while a public body benefitting from an unlimited state guarantee (Caisse Centrale de Réassurance) reinsures natural risks at a competitive price for insurance companies. Nevertheless, increasing natural risks call for regular adjustments. The premia financing the CATNAT regime were raised in 2025, and while the state guarantee had to be activated only once since 1982, increasing risks may require calling the state guarantee more often in the future, which should be accounted for in fiscal planning in Hungary.

Source: (OECD, 2026[59]), (OECD, 2016[50]), (Atreya et al., 2025[53])

Crop insurance coverage against natural disasters has increased due to higher public involvement but remains relatively low, around 45%. Demand for insurance in agriculture is weak due to financial constraints and cultural factors. The government has put in place a damage-mitigation fund for crops in 2012 and a subsidised crop-insurance scheme in 2014. The damage-mitigation fund is jointly financed by farmers (30%), the government (30%) and the EU Common Agricultural Policy (40%). A state subsidy covering up to 70% of the premia makes crop insurance more affordable to farmers. They are also encouraged to subcribe to a crop insurance by receiving a higher compensation from the damage-mitigation fund. This strategy has improved insurance coverage in agriculture, but could be revaluated in view of increasing drought risks. For example, the three-years period to calculate the subsidy could be reviewed in case of consecutive drought years.

In Hungary, as in many OECD countries, insurance premia are not based on the flood risk. At first sight, risk-based pricing of insurance premia would provide incentives to undertake mitigation and adaptation investments and reduce moral hazard (see next section). Nevertheless, risk-based pricing is less needed when land use regulations are enforced (Villeneuve and Grislain-Letrémy, 2022[60]) and it should not compromise insurance affordability. For example, it would not be efficient to penalise households who own a dwelling in a flood-prone area but cannot afford higher premia. The price signals are more effective where policyholders have the capacity to reduce risks and make adaptation investment. A possible way forward would be to maintain affordable default premia while offering discounts to dwelling owners investing in risk mitigation. This has been implemented to encourage wildfire mitigation in California, as well as in Denmark and the UK (OECD, 2023[61]). Programmes in France and the US provide incentives or premium discounts for community-level risk reduction measures. In Germany, deductibles depend on the risk-mitigation actions that have been undertaken (Atreya et al., 2025[53]).

There is limited information on how physical climate risks may impact financial stability in the insurance sector. At the end of 2022, only 12 out of 22 Hungarian insurers had conducted a long-term climate change risk assessment while only 60% of insurers had identified climate change risks within their business planning horizon (MNB, 2023[23]). The Hungarian Central Bank (MNB) conducted a long-term climate stress test on green transition costs for insurers in 2022, which suggested that transition risks were manageable, and issued recommendations on the identification, management and disclosure of climate-related and environmental risks. Local insurance companies evaluate the possible impact of physical climate risks in their own risk and solvency assessment reports. However, no stress tests have been conducted to assess the exposure of insurers to physical climate risks. By contrast, the MNB’s long-term climate stress test for banks covered both transition and physical risks. The MNB should therefore supervise the implementation of stress tests on physical risks for insurers.

Restoring key public infrastructure that has been damaged by a natural disaster is crucial to ensure a rapid economic rebound, but this can be costly for public finances. Most governments, including in Hungary, do not subscribe insurance for public infrastructure, leading to implicit contingent liabilities. To avoid facing unexpected expenditures when natural risks materialise, Hungary should assess the benefits of insuring key infrastructure assets on the private market as in Colombia and Vietnam or through a public-private insurance programme (if established) as in France, Iceland and Spain (OECD, 2026[59]) or setting aside some public revenues every year to contribute to a dedicated public fund. Some countries like Australia and the Philippines have established public insurance entities collecting premia which may then transfer risks to international reinsurers (OECD, 2022[56]). Cost-sharing arrangements between different levels of government could also be set up. In Mexico, the central government covers all national public infrastructure assets up to 50% and in Canada between 50-90% of reconstruction costs of locally-owned infrastructure (OECD/WBG, 2019[57]).

2.2.5. Strengthening and enforcing land-use regulations

Efforts to extend insurance coverage should be accompanied by effective land-use regulation, especially when insurance premia do not depend on local risks (Villeneuve and Grislain-Letrémy, 2022[60]). In Portugal, construction is forbidden in areas with high wildfire hazard, and in Japan the building code has become more stringent to ensure resilience against earthquakes. In areas where natural risks are too high or too costly to be insured, land-use regulations should simply prohibit constructions. Although Hungary’s legal framework forbids or firmly regulates building in floodplain areas, its enforcement should be strengthened. Land-use regulation is further complicated by a fragmented system of responsibilities for area classification and local building regulations often contradict national ones. Development continues in hazard-prone areas, situated mostly in protected floodplain areas, partly because municipalities lack updated land-use plans with well-identified building restrictions. Hungary recorded the largest increase in the share of built-up areas exposed to river flooding among OECD countries between 2000 and 2022. This share reached 11%, twice the OECD average. In this context, land-use regulations need to be strengthened and strictly enforced. Risk prevention plans, including no-build zones, should be made mandatory at the municipal level and regularly updated, potentially with the technical and financial support of the government, and with the lack of enforcement subject to penalties. In France for example, the CATNAT insurance scheme (Box 2.2) penalises municipalities without a risk prevention plan (mandatory through legislation), and the United States reserve coverage by the National Flood Insurance Program to municipalities which implement local floodplain management regulations (OECD, 2026[59]). In Sweden, local governments have been held liable for flood damages because of inadequate land-use planning.

The need to build back better or elsewhere after a natural disaster should be explicitly reflected in the Hungarian legislation. The relocation of properties outside of high-risk areas can be cost-effective to reduce human and economic losses (Bagstad et al., 2007). After consecutive floods in the city of Lismore, the Australian government developed a programme to support managed retreat (OECD, 2024[62]). In France, a dedicated fund was created in 1995 to finance the relocation of properties threatened by natural hazards, financed via the CATNAT scheme (Box 2.2). A Build-Back-Better programme tied to Flood Re also exists in the UK to integrate resilience measures when insured properties are rebuilt after a natural disaster (OECD, 2026[59]).

2.2.6. Investing in climate adaptation in the private and public sectors

The private sector has a key role to play for adapting buildings and infrastructures to withstand climate impacts. Property damage reduction measures show a high benefit-to-cost ratio in Hungary (Dottori, 2020[41]) while 86% of Hungarians believe that climate change requires investment now to avoid higher costs later (EIB, 2024[33]). Yet, Hungary lags many OECD countries in adaptation initiatives by businesses (Figure 2.8). Concrete efforts are needed to foster private sector adaptation strategies and investment. Domestic credit to the private sector is among the lowest in Europe, thus limiting investment capacity (OECD, 2020[36]) but the situation is gradually improving with the green preferential capital requirement programme initiated by the MNB, which aims to enhance green lending, reduce climate- and environmental-related risks on banks’ balance sheets, and support green investments. Further financial incentives for climate adaptation could be provided by risk-based insurance premia or deductibles depending on past resilience investments (see above). Hungary also needs to address information gaps and financial constraints hampering adaptation investment. For example, public authorities could provide practical guidance on protecting existing homes from climate risks, following examples like the UK’s “Be Flood Smart” campaign and its dedicated website, and consider targeted support to help credit-constrained households and businesses invest in adaptation. This would be justified by positive externalities and long-term fiscal savings from reduced disaster-related losses and could take the form of direct support, tax incentives, or low interest loans (OECD, 2023[61]). In France, a national prevention fund finances part of adaptation investments for exposed SMEs and households in municipalities with a flood prevention plan. A dedicated institution could provide guarantees for green loans and bonds, support green venture capital funds and provide technical advice on adaptation.

Some crucial infrastructure assets for adapting to climate change, such as flood prevention barriers, are public goods with positive externalities. Therefore, the government needs to ensure that they are available in sufficient supply where they are most needed, by contributing to their financing and maintenance. If well managed, climate-resilient assets can be more cost-effective than infrastructure needing to be constantly repaired (OECD, 2024[62]). Nevertheless, Hungary needs to strengthen public procurement governance and systematically rely on cost-benefit analysis to ensure that all investments in this area are cost effective (Chapter 1), even though cost-benefit analysis may not be exhaustive (e.g. regarding the valuation of ecosystem services). Over the past 20 years, approximately HUF 400 billion (0.7% of 2022 GDP) have been invested in the development of flood protection in Hungary, including new reservoirs and flood protection structures along the Tisza river, and new and higher dikes along the Danube (Table 2.3). Burying electric cables protects them from extreme weather events and enhances grid resilience. The July 2025 storm that caused the biggest damage to grid infrastructure in three decades, leaving 350,000 people without power in Hungary (Intellinews, 2025[63]), shows that further action is needed in this area.

In some cases, nature-based solutions can be cost-effective and bring additional environmental benefits (Dottori, 2020[41]). Therefore, they should not be neglected. For example, flood protection mechanisms such as well-maintained forests, floodplain restoration and retention areas have a role to play in the adaptation to climate change (Markart et al., 2021[64]). Nature-based solutions uptake has grown over the past decade with several completed projects and more than 100 on-going ones. It has been mainstreamed in urban planning documents such as the Budapest 2030 Long-Term Urban Development Concept, the Smart Budapest City Vision and the Green Infrastructure Action Plan (OECD, 2023[35]). Hungary has also started river renaturalisation on the River Dráva to help reduce both flood and drought risk. Looking forward, it could take example from the Dutch Room for the River programme, which creates space for rivers by relocating dikes and prohibiting development in restored floodplains. The 2024 Hungarian Act on Architecture brings several nature-based innovations such as green spaces and roofs. However, these ideas have only been applied in small-scale projects so far and the use of grey infrastructure remains the default approach (OECD, 2023[35]). Retention basins to store flood water show a high benefit-to-cost ratio (Dottori, 2020[41]) but would require sacrificing some farmland and thus public support. Recent initiatives such as new irrigation programmes and recent nature-based solutions calls for proposal are welcome. In order to encourage further nature-based solutions uptake, including in small municipalities which may lack technical expertise, Hungary could create a nature-based solutions Competence Centre, as in Germany.

Figure 2.8. Hungary lags behind many OECD countries in private sector adaptation initiatives

Adaptation indicator, average over 2022-2023

Note: Data are based on EIB Investment Survey 2024. The indicator covers information on firm adaptation over 2022-23. 'Adaptation strategy' refers to firms adopting an adaptation strategy to physical risks, 'Investments' refers to actions to avoid or reduce exposure, and 'Insurance' indicates the purchase of insurance products to offset climate-related losses. Each bar represents the sum of the shares across the three relevant responses.

Source: (Costa et al., 2024[30]), authors' calculations.

Statlink

Table 2.3. Policy instruments for climate adaptation in Hungary and in the OECD

	Policy description (and cost if available)	Other example in OECD countries
Economic instruments	- State subsidy for crop insurance and public damage-mitigation fund with higher compensation for insured farmers - Energy home renovation program: up to 6 million forints in government subsidies for energy-saving upgrades to family homes.	Colorado Wildfire Mitigation Deduction enabling owners to claim tax credits for wildfire mitigation, United States grants to strengthen the resilience of buildings
Regulations	- Green urban planning (2024): New building codes require integration of green infrastructure and rainwater reuse - The Water Management Act regulates flood protection areas	Japanese Building Standard Law and the Seismic Design Code; construction bans in Portuguese zones with high wildfire risk
Information provision	- National Adaptation Geo-information System (NAGiS) - Water management and disaster risk reduction Program (HUF 307 billion) - Events on adaptation organized by the Ministry of Agriculture - Regulation on green infrastructure of settlements, green space certification, and green labels	UK’s “Be Flood Smart” campaign, Japanese Emergency Warning System (J-Alert), French heat wave warning system
Direct provision of public goods	- Danube project: 120km-long of flood-protection dike (80% EU-funded) - Vásárhely Plan: 7 reservoirs built along the Tisza river - Project "Hilly reservoirs in the territory of Hungary, Flood peak" - 1,211 irrigation projects (HUF 176.5 billion) - Nature-based solutions such as renaturalisation on the River Dráv.	Dutch Delta Works, London Thames Barrier, Vienna Danube Side Channel

Source: Hungarian government and OECD adaptation framework (OECD, 2024[29])

Agriculture will need to adapt and evolve to strengthen long-term climate resilience. The focus on agriculture in the second Climate Change Strategy is welcome, as well as the Water to the Landscape programme, launched in 2025 to promote the retention of excess water locally and the utilisation of the storage capacity of canal systems. Moving towards a resilient agriculture and sustainable land use involves fostering investments in innovation, infrastructure and biosecurity (e.g. climate-resilient crops and breeds, climate-adapted production methods, and enhanced water management), and providing advice to farmers more systematically (OECD, 2023[65]). Increasing the targeting of agricultural support towards climate-resilient practices would help. Hungary also needs a more integrated, landscape-level water management approach to address both water scarcity and excess to reconcile the needs of different sectors, including nuclear energy and battery-producing industries.

Investments in the health system should not be neglected either, in particular to reduce mortality during heat waves. Hungary has introduced a Heat-Health Watch Warning System in 2005, heat and UV protection plans for critical rooms in hospitals and issues public guidelines during extreme heat events. However, in spite of this alert system, intensive heat waves continue to cause a high number of excess deaths, highlighting the need for more effective and targeted public health interventions (Páldy and Bobvos, 2013[66]). In France, the excess mortality during the 2006 heat wave was markedly lower than during previous similar events thanks to national preventive measures taken after the 2003 heat wave such as a new warning system, emergency plans and air-conditioning equipment for hospitals and retirement homes, city-scale censuses of the isolated and vulnerable people, and visits to those people during alert periods (Fouillet et al., 2008[67]).

2.2.7. Accounting for climate mitigation and adaptation in fiscal planning

Accounting for climate adaptation in fiscal planning is critical (Akanbi, 2025[68]). Fiscal planning does not yet account for the contingent liabilities related to natural disasters, even though their annual economic cost is projected around 0.5% of GDP under some scenarios (Table 2.2). Even if Hungary improves the coverage of insured losses by reforming the insurance system, the government will at least need to offer its guarantee, and this requires setting aside some provisions. Identifying and quantifying climate adaptation investments in fiscal projections is also key to ensure adequate funding. For example, the renewal of existing water supply and sanitation infrastructure will cost around 2.3% of GDP between 2020 and 2030 (OECD, 2020[36]). The government must fund 0.2% of GDP only to cofinanced EU-funded projects relative to adaptation investment (the cofinancing rate is 85% on average) up to 2027 (European Commission, 2025[69]). Hungary should also clarify financial responsibilities across levels of government and funding sources with consistent annual allocation for ex-ante and ex-post adaptation measures. Conditional grants tied to adaptation targets could be considered for municipalities. Budgeting frameworks also should integrate systematically resilience and nature-based solutions, in line with NECP intentions but with clearer operationalisation.

Fiscal planning should also reflect all mitigation costs from the green transition for the public sector. In order to achieve national decarbonisation and energy efficiency objectives, significant investments will be required in the upcoming decades, estimated close to 5% of GDP per year according to the NCDS (Ministry of innovation, 2020[70]). Ensuring sufficient financing and clarifying what should be supported by the government, the EU and the private sector will be key. Between 2015 and 2023, around two thirds of climate investments were undertaken by households and firms, including using domestic green financing, and a third were funded by the public sector in Hungary, according to the statistical office. Applying this split and taking into account EU funds that would be available by 2027 (around 5% of GDP, including EUR 6.5 billion of RRF grants) and assuming partial continuation of EU climate support thereafter, it would mean that around 1% of GDP per year in public spending should be allocated to climate change mitigation. Around half of this public spending (i.e. 0.5% of GDP) would represent the Hungarian co-financing under all EU-funded green policies in the short term. Since around 0.2% of GDP are spent on climate mitigation in the last budgets (2021-2025), the additional public financing need for climate mitigation would be around 0.8% of GDP per year. These estimates do not account for the additional public cost associated with losses from fuel taxes to reach government emission targets, which could be high in the medium run as observed in other countries. Hungary could use the new OECD tool for calculating the fiscal impacts of environmental pressures (OECD, 2025[71]). Chapter 1 discusses how to fund these mitigation and adaptation costs and incorporate it into fiscal planning.

Table 2.4. Policy recommendations

MAIN FINDINGS	RECOMMENDATIONS (Key recommendations in bold)
Climate change mitigation and energy security
Increasing the share of renewables in the energy mix would limit emissions and improve energy security. The wind potential remains largely untapped.	Ensure that the recent easing of regulations to install windmills translates into accelerated installation, by implementing digital platforms, one-stop shops, and “silence is consent” rules.
Large investments in the electricity grid are needed to accommodate an increased reliance on renewables.	Allow the grid operator to raise fees to cover operating costs and investment needs if EU and government financing proves insufficient.
Carbon prices in the transport sector are among the lowest in the OECD.	Reduce fossil fuel subsidies, while increasing fuel excise taxes or implementing a carbon tax on CO₂ emissions in transport. Redistribute the additional revenues back to households.
Despite policy incentives, the uptake of electric vehicles (EVs) remains low.	Require businesses operating large car fleets to include a larger share of EVs in the options proposed to employees.
Despite a dense rail network, less than half is electrified and train usage represents a limited share of passenger transport. Transport energy intensity has risen since 2010.	Further electrify the rail network. Develop road and rail interconnections, including park-and-ride facilities, and raise parking fees and congestion charges in city centres.
Natural gas prices for households are the lowest in Europe. This lowers incentives for residential renovation and exposes public finances to fluctuations in global energy prices.	Continue restructuring energy support by moving from price caps to targeted transfers to support vulnerable households.
Despite multiple support programmes, dwellings remain poorly insulated and emissions from the building sector are consistently high.	Streamline the existing support schemes for the renovation of buildings by prioritising the retrofitting of the least efficient dwellings and linking subsidies to energy efficiency gains.
Adaptation to climate change
Households and firms have limited information on climate risks. The existing geo-Information System (NAGiS) on climate risks could be used more by (insurance) companies, households and municipalities.	Make climate-risk assessments systematically available to buyers of residential or commercial properties. Use NAGiS as a basis for all risk prevention plans, update its underlying data regularly, and improve its user interface.
There is limited information on how physical climate risks may impact financial stability in the insurance sector.	The Central Bank should oversee the implementation of stress tests to assess the exposure of insurers to physical climate risks.
Land-use regulations are not adequately enforced in protected floodplain areas, and they do not sufficiently account for climate-related risks.	Ensure that all municipalities have regularly updated risk-prevention plans and strengthen the enforcement of land-use regulations.
Due to insufficient insurance coverage in high-risk areas, the share of insured losses is low after natural disasters and the government has to step in.	Make flood insurance compulsory for all properties while introducing a government-backed reinsurance mechanism and creating a dedicated natural disaster relief fund.
Hungary lags behind many OECD countries in private sector adaptation initiatives.	Encourage insurers to offer lower premiums or deductibles to property owners investing in risk mitigation. Consider using part of the natural disaster relief fund to support private investments in risk mitigation and the relocation of people living in high-risk areas.
Losses from climate disasters and adaptation investment needs are neither quantified nor provisioned in the fiscal budget.	Ensure that fiscal planning accounts for investments needs in climate adaptation and that sufficient provisions are set aside to face future climate risks. All investments should be based on rigorous cost-benefit analysis.
Intensive heat waves continue to cause a high number of excess deaths in Hungary. Advance preparation of the health system is key to reduce mortality during heat waves.	Ensure that all hospitals and retirement homes have emergency plans and are equipped with air-conditioning. Maintain updated censuses of isolated and vulnerable people and organise visits to those people during heat waves.

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