Dimitris Mavridis
OECD
Aida Caldera Sánchez
OECD
Claudia Ramírez Bulos
OECD
OECD Economic Surveys: Spain 2025
Abstract
As one of the most climate-exposed countries in Europe, Spain faces growing risks from droughts, floods, and heatwaves. Spain must strengthen adaptation measures to manage these impacts. Scaling up investment in protective infrastructure and aligning water pricing with actual scarcity will be critical, especially in agriculture. Spain is a frontrunner in the expansion of renewable electricity generation, which accounted for over 50% of the mix in 2023, helping improve the economy’s competitiveness. Despite recent measures, grid congestion and low but growing curtailment could slow further expansion. To boost gains from variable renewables, accelerating investment in grid infrastructure and enhancing system flexibility will be key. Increasing investment in low-carbon transport infrastructure and phasing out fossil fuel subsidies by aligning all fuel taxes with their carbon content is also needed to further decarbonize the economy.
4.1. Spain faces a dual climate challenge: despite progress in recent years, it must intensify mitigation efforts to meet its greenhouse gas reduction targets and contribute to limit global warming, while also strengthening adaptation to intensifying climate impacts. Even with ambitious decarbonization, as one of the most climate exposed countries in Europe, climate risks such as prolonged droughts and heatwaves, floods and storms, and wildfires will intensify in the years ahead even if global pledges are fully met (OECD, 2024[1]). Addressing both dimensions is essential to safeguard economic stability and protect vulnerable regions and sectors. Well-designed adaptation cuts today’s losses and preserves public support for ambitious decarbonisation, while least-cost mitigation tempers tomorrow’s adaptation costs and eases fiscal pressure (OECD, 2021[2]).
4.2. This chapter reviews progress on adaptation and mitigation policies and sets out priorities to accelerate the green transition while building resilience to climate impacts. The first section diagnoses Spain’s exposure and vulnerability to the five hazards that drive most climate-related damage—floods, storms, heatwaves, wildfires and droughts. It assesses existing planning, investment and insurance frameworks against emerging OECD practice. The second section presents the mitigation challenges. It reviews the cost-effectiveness of Spain’s current decarbonization plans and identifies potential reforms.
4.3. Spain is among the European countries most exposed to the impacts of climate change, experiencing some of the most severe human and economic losses (Figure 4.1). Rising temperatures, declining rainfall and increasing frequency and intensity of extreme events and sea level rise pose serious threats to the economy, society and ecosystems. Average temperatures have risen notably, prolonging summers by nearly five weeks compared to the 1980s, with over 80% of the population regularly experiencing extreme heat events. Cropland soil moisture declined by an average of 1.4% between 2017 and 2021, exacerbating drought risks, especially in southern regions. Additionally, Spain faces significant coastal erosion due to rising sea levels, and over 60% of its forested areas are now at extreme wildfire risk (MITECO, 2021[3]). Four climate hazards, in particular, droughts, floods, heatwaves and wildfires, stand out both in their severity and frequency, with wide regional variation, exposure and vulnerability. Moreover, Spain’s high share of arid and semi-arid land, extensive coastline, ageing population and reliance on climate-sensitive sectors such as agriculture and tourism magnify the country’s vulnerability.
4.4. Adapting to these risks requires strengthening Spain’s resilience to climate change. Spain was one of the first countries in the EU to recognize the urgency of climate adaptation, and it established a national framework to guide and prioritize efforts. Spain’s adaptation policy, outlined in the National Plan for Adaptation to Climate Change, is well aligned with EU best practices and provides a solid strategic framework with broad sectoral coverage and clear risk identification (PNACC, Box 4.1). By fostering cross-sectoral coordination, research, and stakeholder engagement, the PNACC aims to mainstream adaptation policies across governance levels and mobilize resources to enhance resilience in the face of worsening climate impacts. However, its implementation remains uneven, particularly at the regional and local level, due to limited capacity, fragmented responsibilities, insufficient integration into sectoral policies and budgets, and losses that are not properly provisioned.
4.5. Losses from climate-related disasters in Spain are insufficiently provisioned, leading to considerable fiscal risks. Underinvestment in preventive measures exacerbates these vulnerabilities, despite strong evidence that adaptation investments offer high economic returns. Benefit-cost analyses of European disaster risk management projects frequently demonstrate ratios between two and ten, sometimes exceeding 20, underscoring significant potential savings in avoided damages and co-benefits (The World Bank, 2021[4]). Moreover, inequalities in adaptation capacity persist across regions, sectors, and populations, disproportionately affecting elderly and low-income groups.
4.6. Realizing the economic and social benefits of adaptation requires scaling up investments in resilience infrastructure, disaster preparedness, and nature-based solutions. Spain’s National Adaptation Plan emphasizes integrating sector- and hazard-specific measures into urban planning, water resource management, and infrastructure resilience strategies. Effective coordination between national, regional, and municipal authorities is vital to align these adaptation measures with broader developmental and environmental goals (MITECO, 2021[3]). Enhanced investment and improved institutional coordination will enable Spain to build the resilience necessary to mitigate climate impacts, ensuring economic stability and social equity.
Economic losses per capita and fatalities per million inhabitants over the period 1980-2024
Note: EU-27 refers to a population-weighted average and excludes Malta. Economic losses presented in constant 2024 EUR.
Source: European Environmental Agency.
Note: Disasters exclude earthquakes. Panel A: The value for the year 2024 is an estimate. The economic losses refer to insured losses only. Droughts are excluded from the analysis yet are among the costliest disasters but whose effects are harder to quantify.
Source: OECD and Swiss Re, sigma database. All rights reserved.
The National Plan for Adaptation to Climate Change (Plan Nacional de Adaptación al Cambio Climático, PNACC) was first introduced in 2006 and has since been updated, with the latest version covering the period 2021-2030. The PNACC serves as the strategic framework for evaluating climate impacts, vulnerability, and adaptation actions across different sectors and governance levels. It provides guidance for national, regional, and local administrations to develop and implement adaptation measures that align with Spain’s broader environmental and economic policies.
The plan sets three overarching goals:
1. Reducing Spain’s vulnerability to climate risks,
2. Integrating adaptation into all relevant public policies, and
3. Enhancing knowledge, innovation, and public participation.
It operates through multi-level governance, with the central government coordinating efforts via the Spanish Office for Climate Change (OECC), while autonomous communities and municipalities design and implement region-specific adaptation strategies. Sectoral adaptation work programmes focus on key areas, including water resources, agriculture, forestry, biodiversity, coastal zones, infrastructure, health, and tourism.
To translate strategic goals into action, the PNACC is implemented through five-year work programmes, which outline specific actions, responsible institutions, and monitoring mechanisms. The plan also emphasizes climate data and risk assessment tools, such as the Spanish Climate Change Scenarios Platform, to support evidence-based policymaking. Recognizing the importance of local adaptation, Spain has developed guidelines for municipalities, encouraging cities to integrate climate resilience into urban planning, water management, and disaster risk reduction.
Source: Plan Nacional de Adaptación al Cambio Climático, PNACC.
4.2.1. Strengthening fiscal resilience to climate risks
4.7. The increasing frequency and severity of climate-related events poses risks to Spain’s public finances. The costs of climate-related disasters have increased in the past two decades in Spain, as in the rest of the EU (European Environment Agency, 2024[5]). Droughts are among Spain’s costliest natural hazards, but their slow-onset and diffuse impacts and across sectors make direct loss estimates notoriously difficult to pin down (OECD, 2025[6]). Floods and storms were the costliest disasters, they account together for around 80% of direct economic damages in the past 25 years. The October 2024 flood in Valencia was the costliest disaster in the past decades, causing 232 deaths, direct damages of around EUR 4.8 billion and total damages nearing EUR 17 billion (1.1% of GDP). Winter storms and floods have repeatedly caused losses exceeding EUR 0.85 billion yearly in the past two decades, based on OECD calculations using Swiss Re data. Compared to other EU countries, Spain ranks among the most affected in terms of economic losses per capita (Figure 4.2). Spain also has a high number of fatalities per million inhabitants. This underscores the need for stronger adaptation measures to mitigate both the human and economic toll of extreme weather events.
4.8. Spain’s disaster financing framework is widely regarded as a best practice model internationally, thanks to the strong performance of the Consorcio de Compensación de Seguros (CCS). The central element of its disaster compensation framework is the public-private insurance system managed by the CCS, a state-owned insurer that guarantees coverage in situations where private insurability is limited, including extraordinary natural-disasters, and facilitates universal insurance for individuals, families, and businesses by substantially reducing insurance costs. It is funded through a mandatory surcharge on all property, life, and accident insurance policies issued by private insurers, which results in high coverage, with around 75% of Spanish property is insured and therefore subject to the CCS surcharge, a high level of coverage compared to the OECD average. The system enables fast, automatic payouts and helps limit public liability for disaster recovery. The CCS’s financial strength and operational readiness have proven effective in events such as the 2024 Valencia floods.
4.9. When disasters happen, the CCS can efficiently and quickly compensate losses using its accumulated reserves and this system has demonstrated resilience and sufficient capacity to cope with current climate risks. However, as disaster frequency and severity increase, maintaining the system’s financial sustainability is essential. For major disasters, Spain relies heavily on ex-post public disaster financing, including emergency lines and ad hoc budget reallocations. Unlike pre-arranged instruments such as contingency reserves or catastrophe bonds, this approach creates fiscal uncertainty and weakens incentives for long term resilience. Strengthening risk financing frameworks would improve preparedness, reduce budgetary volatility, and protect fiscal space for adaptation.
4.10. Spain’s risk insurance system ensures broad coverage. The catastrophic risk coverage system in Spain is developed on two levels within the same insurance policy. At the first level, it is the private insurance companies who carry out the risk selection and estimate the premium based on risk exposure. At a second level, the CCS covers through a uniform price per insured risk class, achieving a high penetration of catastrophic risk insurance and a high pooling across the Spanish territory. International experience shows that maintaining risk pooling and solidarity can be compatible with targeted pricing adjustments. As part of its catastrophic damage prevention efforts, the CCS is encouraged to carry out prevention promotion actions in the riskiest areas. Linking payouts or central-government grants to local risk-reduction efforts, as in some OECD countries such as Australia, Canada, France and the United States (OECD, 2023), could support resilience without undermining the system’s core principles.
4.11. To strengthen fiscal preparedness for climate-related disasters, Spain would benefit from a more strategic and proactive financial approach. This includes establishing contingency funds explicitly earmarked for climate-related emergencies and exploring sovereign risk instruments such as catastrophe bonds to diversify sources of disaster financing. Consistent with forthcoming obligations under Directive 2024/1265/EU, embedding systematic assessments of climate-related macro-fiscal risks and contingent liabilities within the medium-term budgetary planning —and publishing the associated fiscal costs—would enhance transparency and fiscal preparedness. Contingency funds could be financed through a modest earmarked annual budget transfer. While earmarking fiscal resources requires careful design to avoid inefficiencies and trade-offs with other spending needs, doing so can enhance fiscal preparedness and speed of response. Integrating climate-related risks and contingent liabilities into medium-term budgetary frameworks, along with clear guidelines for climate resilient investment can improve fiscal predictability and support more efficient and timely responses to disasters. Additionally, developing clear guidelines for climate-resilient public investment planning, including systematic cost-benefit analyses that account for financial risks associated with disasters, would facilitate more informed investment decisions and efficient use of public resources.
4.12. Enhanced coordination mechanisms across levels of government should complement these fiscal instruments, clearly defining roles and responsibilities in disaster risk financing. Recent experiences have demonstrated that tensions between the central government, regions, and municipalities complicate rapid and effective responses during crises. Implementing ex-ante cost-sharing arrangements, increasingly common in OECD countries (OECD/The World Bank, 2019[7]), could facilitate a clearer allocation of responsibilities for rehabilitation and reconstruction of subnational public infrastructure. For example, in Canada and Mexico, ex-ante arrangements establish that the central government provides up to 50% (in Mexico) and between 50-90% (in Canada) of the costs of rehabilitation and reconstruction of sub nationally owned public infrastructure. In Australia, once state disaster costs exceed an agreed threshold, then federal funds are activated to cover 75% of eligible expenses. Moreover, providing technical assistance to municipalities to develop and finance local adaptation plans can enhance local capacity and improve the quality and feasibility of adaptation projects.
4.2.2. Floods and storms are a growing and costlier threat
4.13. Floods and storms are Spain’s most destructive natural hazards (Figure 4.2)The country faces multiple types of flood risks, fluvial (river), pluvial (surface water) and coastal flooding, with significant regional variation in exposure. Extreme precipitation events often overwhelm urban drainages and river basins, resulting in flash floods and prolonged inundations. Five autonomous communities are particularly exposed to river flooding (Figure 4.3). Coastal provinces in the north and east face growing risks from storm surges (north) and inland flooding (east). Intense rainfall events, often concentrated in short periods, lead to flash floods, especially in the Mediterranean areas, while sea level rises, and storm surges are a growing threat to low-lying coastal zones. Urbanization of flood-prone areas has increased the exposure and the costs of floods.
4.14. Flood risks are expected to increase due to continued urbanization and more frequent extreme precipitation that comes with climate change. Climate projections suggest rising sea levels and shifting storm patterns could increase the frequency and intensity of coastal flooding (IPCC, 2022[8]). Shifting rainfall patterns combined with reduced soil moisture suggest a decreased ability for land to absorb heavy rainfall, thus increasing the frequency and severity of flooding.
4.15. Spain has a well-developed framework to identify risks and prioritize policies and investments to mitigate the effect of floods. Governance of flood risk involves a broad range of stakeholders, notably the river basin authorities (Confederaciones Hidrográficas), regional governments and municipalities. Flood Risk Management Plans (FRMP), developed under the UE Floods Directive, provide a strong foundation for identifying high risk areas, prioritizing investment, and informing land use planning. These plans are grounded in robust risk assessment and cost-benefit analysis and coordination mechanisms. Early warning systems, such as the Automatic Hydrological Information System (SAIH) provide real-time flood risk updates and are coordinated among stakeholders. Systematically integrating high-resolution earth-observation data (e.g. Copernicus Sentinel imagery) into flood-hazard modelling and land-use planning—especially in catchments with sparse gauges—would further improve the evidence base for investment and zoning decisions (Alonso-Robisco et al., 2024[9]).
4.16. Despite this strong institutional architecture two key challenges undermine the effectiveness of Spain’s flood risk strategy. First, implementation of planned investments is often delayed or deprioritised, particularly flood protection. In some cases, river basin authorities have selected flood protection measures through cost-benefit analyses, yet they face lengthy and complex procedures that slow delivery or impede starting works. In other cases, local environmental concerns contribute to reluctance to pursue infrastructure, despite an identified need of structural investments. Second, land-use incentives at the local level often run counter to national flood risks objectives. Risk signals in high-exposure areas may be muted due to national pooling of risks on largely uniform insurance pricing terms. A careful adjustment of insurance-premia to better reflect risk can reinforce prevention while preserving universality. Introducing local accountability mechanisms —such as risk-based insurance surcharges partly borne by municipalities that authorise construction in flood-prone zones— would help internalise these costs and discourage further exposure.
Population exposure to river flooding in a 10-year return period, % of the population, 2020
Source: Ministerio para la transición ecológica y el reto demográfico.
4.17. Adaptation to floods can be significantly improved through a balanced portfolio of investments combining structural measures, nature-based solutions, and improved governance incentives. Firstly, land-use planning could benefit from being more rigorously enforced, ensuring alignment of local development decisions with national and river-basin flood management strategies. Strengthening zoning regulations to prevent construction in vulnerable areas, complemented by financial penalties or reduced disaster aid for non-compliant municipalities, could curb risky developments. Calibrating insurance design can reinforce prevention while preserving solidarity: phase in more risk-reflective premiums, consider tighter limits for repeat-loss properties in high-hazard zones, and offer premium credits or co-financing for private flood-proofing. These adjustments would better align local development choices with national flood-risk objectives.
4.18. Secondly, investment in flood protection infrastructure is crucial. To further mitigate the effects of extreme precipitations, additional investments are needed in large-scale water retention and storage infrastructure selected by relevant authorities on a rigorous cost-benefit analysis that includes environmental effects. This includes dams, retention basins, and upgraded drainage systems. While dams can be a solution to increase water supply during dry spells, they are not an effective measure in a context of projected decrease in precipitation. Alternative approaches can also be explored, including investments in land restoration and protection to maintain and enhance natural groundwater storage. A dual strategy combining large infrastructure to manage extreme events with smaller, decentralized systems for regular flooding is recommended, as evidenced by successful international practices from the Netherlands and Australia (The World Bank, 2021[4]).
4.19. Public investment towards climate adaptation projects generates high returns, particularly when directed towards projects selected on a rigorous cost-benefit analysis. To fund further investments, revenues could be secured through a specific water tariff and, —subject to detailed feasibility, property tax surcharges (IBI) on developments in flood-prone regions. Given housing-market tensions, any IBI surcharge would undergo a rigorous impact assessment and, if affordability risks are material, alternatives—such as a flood-risk levy on water bills, risk-based developer contributions, or targeted budget transfers—should be preferred to finance adaptation without distorting the housing market. Many structural infrastructure projects such as dams and water retentions, identified as necessary in river basin plans, face long delays due to complex administrative procedures and slow environmental authorisation processes. This results in under-execution of investments that contribute to adaptation, even when cost-benefit analyses are favourable (Rodriguez, 2024[10]). Streamlining environmental and regulatory assessments could accelerate the implementation of priority infrastructure projects, addressing the current delays that compromise Spain’s flood resilience.
4.2.3. Increasing droughts require stronger incentives for efficient water use
4.20. Spain is one of Europe’s most exposed countries to chronic water stress (Figure 4.4, Panel A). Long-term trends show a significant decline in annual rainfall and snowpack, combined with rising temperatures and evaporation rates (Jiménez-Donaire, Giráldez and Vanwalleghem, 2020[11]). Soil moisture in southern Spain has decreased significantly (Figure 4.5) intensifying water stress in agriculture. Water scarcity disproportionately impacts agriculture but also industry and tourism, and its geographical impacts are felt stronger in southern regions like Murcia, Andalusia, as well as Cataluña, with the latter recently facing severe drought stress. The gradual nature of droughts losses makes them less visible than abrupt events, but their cumulative effect reach EUR 1,5 billion annually in Spain (Cammalleri, 2020[12]).
4.21. Compounding water scarcity, desertification now affects around 74% of Spain's territory, generating considerable costs for households, businesses, and infrastructure (MITECO, 2022[13]). Desertification lowers agricultural productivity, raises wildfire risks, and worsens flooding through reduced soil absorption capacity. Water intensive sectors, such as agriculture, particularly in the south and southeast, are particularly vulnerable. Recent municipality-level evidence shows that a 1 % increase in aridity reduces bank lending to non-financial corporations by around 0.2 % over the medium term, with agriculture hardest hit (Broto and Hubert, 2025[14]).
4.22. Spain has significantly improved water management over recent decades and has a relatively advanced institutional framework for water management, in line with the EU Water Framework Directive. As a result, leakage rates have declined, though they remain above OECD averages (Figure 4.4, Panel B). Additionally, Spain has effectively developed alternative water sources, including widespread water recycling and extensive desalination facilities, reducing pressure on traditional freshwater resources and enhancing resilience during drought periods – with the notable example of the Murcia region where almost 90% of urban water is recycled for agricultural use. However, implementation challenges persist, and four key policy areas show room for improving water allocation and supply, in particular overextraction of water and unsustainable demand, fragmented governance, slow uptake of demand side solutions and unequal adaptation capacity.
Addressing overextraction and unsustainable water demand
4.23. Groundwater depletion is widespread, with many aquifers overexploited particularly in tourist and intensive-irrigation areas. Water pricing provides minimal incentives for users to reduce consumption. Despite growing scarcity, water pricing often fails to reflect water scarcity or environmental costs leading to inefficient use. Water tariffs across agriculture, industry, and households are systematically subsidized, rarely recovering even basic operational costs, let alone reflecting capital costs nor environmental scarcity costs (OECD, 2020[15]).
4.24. Agriculture, consuming around three-quarters of national water, is at the heart of the inefficiency. Farmers rely primarily on administrative water allocations rather than marginal pricing, facing virtually no incentives to optimize water use. In cases where marginal pricing exists, agricultural users face tariffs as low as EUR 0.005 per cubic meter—around half their marginal operational cost and approximately 400 times lower than urban water prices. Moreover, these marginal prices are two to three orders of magnitude below the shadow price, highlighting a profound disconnect from the true economic value of water (Murillo, Gracia and Baccour, 2023[16]).
4.25. The absence of effective marginal pricing and tradability of water rights discourages a wider adoption of investments in water-efficient technologies such as drip irrigation, leading to excessive extraction and poor resource allocation (Gruère, Ashley and Cadilhon, 2018[17]). A key bottleneck to introducing marginal pricing is the lack of a metering infrastructure. While introducing metering in agriculture entails substantial upfront investment, evidence suggests Spanish farmers are willing to pay between EUR 0.16 and 0.18 per cubic meter for enhanced water security (Sala Garrido et al., 2020[18]). The installation of meters has been identified as a major necessity for improving resource use and has become a condition for newer irrigation modernization subsidies under the Spanish Recovery, Transformation and Resilience Plan. Moreover, implementing and expanding market-based mechanisms, such as tradable water rights or auctions, could encourage efficient water allocation and incentivize conservation. Successful international examples, notably from Australia and Israel (Box 4.2), show that economic incentives coupled with technological investments can significantly reduce water scarcity impacts (OECD, 2021[19]).
4.26. Urban water tariffs in Spain, although varying regionally, are also among Europe's lowest at approximately EUR 2 per cubic meter—substantially below the EU average (EUR 3.5) and neighbouring France (EUR 4), despite France experiencing lower water stress (EurEau, 2021[20]). Aligning tariffs closer to true costs would better reflect scarcity, promoting efficient water use and long-term sustainability.
4.27. Policy efforts have historically focused on increasing supply, via reservoirs, desalination and water transfers, more recently focusing on improving water efficiency and curbing demand. Recent investments in irrigation modernisation improved water use efficiency and enabled precise, plant level fertigation. Greater use of soil-moisture and water-quality monitoring is reducing water and fertiliser use, while nature-based measures (e.g. native vegetation for retention and erosion control) add further savings. Despite this progress, there is still insufficient uptake of water saving technologies, smart irrigation systems, and water reuse, particularly in small municipalities and among certain farmers.
Addressing fragmented governance
4.28. The distinct but interrelated roles between River Basin Authorities (RBA), autonomous communities and municipalities lead to a complex and fragmented governance that creates challenges for enforcement and monitoring of water usage. This is particularly the case for groundwater: there is an estimated 2 million wells in Spain, but only 1 million are registered, and they remain largely uncontrolled (Fornés, López-Gunn and Villarroya, 2021[21]). Spain’s fragmented water governance could be leveraged positively, using it as an opportunity to experiment with diverse reforms, to test policies like increasing oversight of wells, metering, water pricing, and water trading rights. Different RBAs could test a range of different approaches depending on their local knowledge of the ones that would be a best fit. Institutional reforms can also have major effects on water usage. Strengthening the River Basin Authorities by improving water rights registries and groundwater monitoring systems and broadening stakeholder engagement beyond traditional agricultural users could lead to more inclusive, efficient governance and better-adapted water management (OECD, 2024[22]). While Spain already has a national coordination body, the Consejo Nacional del Agua (CAN), this role could be strengthened to support strategic guidance and investment planning across basins. Such central coordination would not diminish room for local experimentation by RBAs; rather, it would provide the strategic guidance, financing signals and enforcement capacity needed to scale successful basin-level innovations nationwide.
Financing water infrastructure and storage
4.29. The financing of water infrastructure remains dependent on public budgets, accounting for approximately 45% of total expenditures compared to the EU-28 average of 30%. Limited pricing mechanisms to cover capital and operational costs result in insufficient cost recovery (OECD, 2020[15]). Raising the share of revenue generated from tariffs, thereby directly linking water costs to consumption, would support investments in infrastructure maintenance and advanced technologies, improving the long-term resilience of Spain’s water systems and better aligning incentives with resource scarcity. Encouraging non-conventional water sources—recycling, reuse, and desalination—for urban and high-value economic activities offers additional resilience to drought conditions. Desalination technology can augment water availability, enhancing resilience to droughts in highly water-stressed regions, and is used successfully other countries (Box 4.2). However, widespread adoption requires higher water prices that reflect the true cost of supply and significant expansion requires careful consideration of energy use and environmental impact.
4.30. Spain's total water retention capacity has remained relatively stable at around 56 000 hm³ over the past two decades, despite ongoing vulnerability to floods and severe drought cycles. While ecological concerns have led to the dismantling of numerous obsolete river barriers—primarily small structures with negligible national-scale impact on water retention—this has not significantly reduced overall storage capacity. Indeed, the recent entry into operation of two new reservoirs (Irueña and La Colada) in 2023–24, along with heightening and safety upgrades of a few older dams, marginally increased total registered capacity. Nevertheless, considering the increasing economic and environmental costs associated with both droughts and floods, the relative stagnation in total reservoir capacity highlights a missed opportunity. Strategic investments in additional, well-located reservoirs—designed with modern adaptive management, ecological compensation measures such as fish ladders, bypass channels, and upstream wetlands—would enhance water security without compromising environmental integrity, enabling a balanced approach between ecological restoration and water security.
4.31. Strengthening financial supervision to address water-related risks is becoming increasingly important. Evidence is mounting that droughts, floods, and chronic water stress can erode asset values, weaken loan performance, and threaten financial stability. Only a handful of Spanish banks have started to systematically assess their water-related exposures. Integrating water risks into supervisory stress tests, credit-risk models, and mandatory disclosures—following guidance from the Network for Greening the Financial System (NGFS), a global coalition of central banks and supervisors, and the Taskforce on Nature-related Financial Disclosures—would improve the resilience of Spain’s financial system and steer investment toward water-efficient infrastructure and technologies.
Improving water quality
4.32. Water quality remains a significant challenge as reported in the previous Economic Survey of Spain (OECD, 2023[23]), particularly due to nitrate pollution linked to intensive agricultural practices and livestock farming, notably pig production. Despite recent regulatory advances aimed at reducing fertilizer misuse, nitrate concentrations continue to exceed EU thresholds, affecting around one-quarter of Spain's surface and groundwater resources (Figure 4.4, Panel B). This not only threatens ecosystems and compliance with EU directives but also undermines Spain’s climate resilience. Climate change is expected to aggravate water quality issues by reducing river flows and increasing pollutant concentrations during droughts. In this context, further tightening regulation of fertilizer application and livestock waste management, along with investment in advanced wastewater treatment, are essential adaptation measures. Recent actions, such as the National Plan for Purification, Sanitation and Reuse (DSEAR Plan), aim to enhance wastewater treatment coordination. However, progress remains limited. These actions will help secure water availability for multiple uses under increasing climate pressure, while delivering co-benefits for health and ecosystems.
4.33. Poor water quality can have direct economic costs. The 2015 harmful algal bloom in the Mar Menor lagoon led to a fall of 43 % in housing investment returns within the affected area over six years, eroding property wealth by more than €4 billion—roughly ten times the cumulative gains agriculture obtained from shifting to irrigation (Lamas Rodríguez et al., 2023[24]). This example shows that lax nutrient management can impose large, long-lasting costs on households and local economies, strengthening the case for tighter fertilizer and manure controls and accelerated investment in nutrient-reduction infrastructure.
Source: OECD Green Growth Indicators; Waterbase, Water Quality, European Environment Agency (EEA).
Change in soil moisture, 2019-2024 compared with 1981-2010, %
Note: Soil moisture is measured based on the volumetric water content of the topsoil layer.
Source: OECD IPAC Climate Action Dashboard, OECD.
Israel effective use of water pricing
Israel is one of the most water-stressed countries in the world at the same time it is internationally recognized for its water pricing policies, designed to reflect true water scarcity and promote conservation. Water tariffs are set to fully recover operational, maintenance, and capital investment costs, incorporating environmental externalities and scarcity premiums (Marin et al., 2017[25]). This approach incentivizes users, particularly in agriculture, to optimize water usage and invest heavily in water-efficient technologies, such as drip irrigation, significantly reducing waste and enhancing productivity.
Israel's comprehensive pricing strategy is supplemented by substantial investment in desalination and wastewater recycling, enabling the country to sustainably manage limited freshwater resources. Approximately 85% of all effluent water is recycled and then used for agriculture, where marginal prices fully reflect costs. More than half of the water used for agriculture is recycled water. These combined measures have transformed Israel into a global leader in water efficiency, achieving remarkable productivity in agriculture despite severe water scarcity.
Gradual reforms, starting in the early 1990s, introduced a three-tiered block pricing for agriculture, gradually raising tariffs as use approached each quota threshold and thereby imposing an increasing marginal cost on excessive consumption. During the 2000s, two measures further solidified cost recovery principles: the government established a unified Water Authority to oversee all water planning and regulation, and an agreement with farmers tied tariffs to actual water production costs, including the higher expense of desalination. By the 2010s, block pricing gave way to a single uniform water tariff near marginal cost. Today, these successive reforms not only encourage more efficient water use but also help preserve ecosystems, demonstrating that strong governance and full-cost pricing are proper tools to reconcile agricultural needs and environmental sustainability.
Australia’s water allocation through market-based trading rights
Australia’s arid climate posed a major challenge from the 1980s onward, as the Murray-Darling Basin – home to half of the country’s agriculture production - began showing signs of severe water stress, including rising salinity and a declining river flow. To reverse this trend, state and federal governments together agreed on a reform process that led to capping surface diversions and ensuring sustainable use of the limited water resources.
Throughout the 1990s and 2000s, successive and gradual reforms introduced fully separating water rights from land ownership (“unbundling”) and allowing trading of water entitlements across regions. Under the 2004 National Water Initiative, states committed to defining clear water allocations, establishing water markets, and ensuring that environmental flows were protected. The 2007 Water Act then strengthened basin-wide coordination via a newly created Murray-Darling Basin Authority.
Today, Australia’s market-based approach is widely credited with making irrigation more flexible, resilient, and transparent. By empowering farmers to buy and sell water entitlements, the trading mechanism allows water to be dynamically reallocated from lower-value to higher-value uses, thus maximizing its productivity as well as the earnings of all parties. The system’s success lies in clear legal frameworks, well-defined property rights, and comprehensive monitoring and enforcement mechanisms. By establishing market incentives, Australian farmers are encouraged to adopt water-saving technologies and practices.
Source: (Siegel, 2016[26]) (Bismuth, Hansjürgens and Yaari, 2016[27]) (Gruère, Ashley and Cadilhon, 2018[17])
4.2.4. Tackling threats from heatwaves and wildfires
4.34. Spain is increasingly exposed to extreme heatwaves posing significant risks to public health and productivity. Around 74% of the population is already exposed to at least two weeks per year of extreme temperatures, up from 50% in 1990 (Figure 4.6). Projections indicate that heatwaves will become more frequent, intense, and longer-lasting (Calvin et al., 2023[28]), potentially causing fatalities to rise significantly without effective adaptation measures (Naumann, 2020[29]). The economic effects of heatwaves are equally rising, heat reduces productivity, particularly in outdoor and physically demanding sectors such as construction and agriculture, disproportionally affecting SMEs (Costa et al., 2024[30]).
Exposure to days where the maximum daily temperature exceeds 35°C
Source: IEA, Climate Hazard Exposure Tracker.
4.35. Spain has taken important steps to manage heat risks. The National Heatwave Plan, active between June to September coordinates early warning systems (EWS), risk communication strategies, and targeted support for vulnerable populations, such as the elderly and chronically ill across the country (Ministerio de Sanidad, 2022[31]). Surveillance systems monitor temperature-related mortality and morbidity in near-real-time, enhancing the government's responsiveness to emerging heat crises. Moreover, the Health and Safety Strategy 2023-27 (Ministerio de Sanidad, 2023[32]) promotes awareness among firms and workers most exposed to extreme heat, notably in construction and agriculture and aiming to improve the accuracy of reporting heat-related occupational incidents, many of which are classified incorrectly as cardiovascular incidents.
4.36. Despite this progress, opportunities exist to broaden and deepen adaptation measures, particularly in urban and occupational settings, which have been less systematically addressed. Urban areas in Spain remain vulnerable to severe urban heat island (UHI) effects, resulting from limited green spaces, dense infrastructure, and extensive impermeable surfaces. Studies highlight that mitigating urban heat island effects through green (increasing urban vegetation) and white (reflective surfaces) solutions can yield positive benefit-cost ratios between 0.82 and 1.79, with higher returns associated exclusively with green measures due to their multiple co-benefits, such as improved air quality and enhanced urban biodiversity (The World Bank, 2021[4]). International best practices, including EU-funded initiatives such as LifeMedGreenRoof and Urban GreenUP under Horizon 2020, provide valuable insights and can guide Spain in scaling up these nature-based solutions effectively. Urban planning tools and building codes do not yet fully integrate climate adaptation, limiting the capacity to manage heat risks locally. Revising building codes to mandate bioclimatic designs, such as light-colored roofs and natural ventilation, tailored to regional climates, can significantly reduce urban heat stress while enhancing energy efficiency. Expanding urban planning tools, like Barcelona’s superblock model and satellite heat mapping, can target heat hotspots and increase green spaces, yielding high benefit-cost ratios. National incentives, such as funding for compliant regions, can align local efforts with broader adaptation goals.
4.37. While Spain’s early warning systems are functional, further investment is needed to improve local precision and responsiveness for extreme heat. Spain also uses timely public warnings and targeted assistance for vulnerable populations, as in France’s national heatwave warning system, which bring high returns on investment (The World Bank, 2021[4]). Significantly improving data collection on heat-related occupational impacts and strengthening and better enforcing heat-related workplace protections across sectors, particularly in agriculture and construction where informal and seasonal workers face inconsistent enforcement, could reduce productivity losses and health risks. Emerging evidence also shows that wildfires tighten firms’ access to bank credit—especially where local relationship-banks are absent—highlighting an additional economic vulnerability as fire risk rises with advancing desertification (Álvarez-Román et al., 2024[33]).
Increasing wildfires risks bring challenges
4.38. Wildfires are a natural part of Spain’s ecosystem, providing ecological functions like nutrient recycling and growth stimulation. However, their increasing frequency and intensity pose substantial adaptation challenges. Since 1979, the number of fire-weather days—critical for wildfire conditions—has risen substantially, extending Spain’s annual wildfire season by approximately 40 days. Together with Portugal and Greece, Spain experiences Europe's highest exposure to fire-weather days (Figure 4.7, Panel A). Extreme wildfires can cause irreversible biodiversity loss, leading to desertification rather than natural forest regeneration. Such fires are notoriously difficult to control, posing severe risks to human lives and physical assets. A less visible yet critical impact is the surge in respiratory illnesses linked to wildfire smoke, with post-fire analyses revealing elevated morbidity and excess mortality from such conditions (Linares et al., 2018[34]). The 2017 wildfires in Portugal and Spain caused more than 45 direct deaths and around 600 million euros in damages. The 2025 fire season has burnt nearly 400 thousand hectares of forest land, making it the worst fires in the last 30 years (EFFIs, 2025), and demonstrating the country’s significant exposure. Wildfires also damaged and disrupt critical infrastructure such as high-speed rail and electricity lines.
4.39. Rural abandonment has significantly contributed to forest expansion and fuel accumulation. Approximately 84% of Spain’s territory is now inhabited by only 16% of the population. The expansion of wildland-urban interfaces (WUI) covers 15-20% of the country's territory and up to 40% in certain regions such as northwestern Spain bordering Portugal, which further amplifies wildfire risks. These interfaces are particularly vulnerable during the peak summer tourist season when population densities temporarily surge.
4.40. Despite increased hazard exposure, Spain has managed to limit the loss of life and economic assets associated with higher settlement exposure at wildland-urban interfaces through prudent land-use policies and effective emergency preparedness measures (Figure 4.7, Panel B). The results are evidenced by Spain’s capacity to maintain a relatively small burnt area per event despite a high number of fires each year. Historical data show a downward trend in the area burnt per fire event (Figure 4.8).
4.41. To limit the size of burnt area subsequent to fires, Spain has recognized the importance of wildfire prevention. Spain spends more on prevention per hectare of forest compared to France and Greece (OECD, 2023[35]). Investments in wildfire prevention yield high economic returns, with benefit-cost ratios (BCRs) ranging from 1.6 to 39, significantly higher compared to suppression efforts (The World Bank, 2021[4]), with preventive measures, such as fuel management and fire break creation showing high benefit cost ratios (12). Given the extent of Spain’s surface susceptible to fires, these preventative efforts need to be continuously reinforced to limit future forest surface loss and to sustain natural forest regeneration capacities.
Addressing local implementation challenges in fire prevention
4.42. Despite effective national strategies, implementation challenges persist, particularly at the municipal level and regional level, where autonomous communities are responsible for designing and executing concrete wildfire prevention measures. Local governments often lack sufficient financial resources and human capacity to execute regional prevention strategies effectively, such as vegetation thinning, and maintenance of fire breaks. Spanish legislation sets identical technical prevention requirements for public and private forest land; however, afforestation programmes have unintentionally increased fuel connectivity, while the predominance of private land ownership—covering 72% of wildlands—poses significant management and coordination challenges. Spain’s decentralized governance structure, granting regions significant autonomy in wildfire prevention and management, contributes to fragmented and heterogeneous wildfire strategies. This lack of uniformity hampers effective national coordination, particularly regarding buffer zones, where inconsistent enforcement and unclear land ownership complicate policy implementation. Consequently, targeted financial support, capacity-building initiatives, and improved national-regional coordination are essential to enhance policy effectiveness.
4.43. The anticipated increase in fire-weather days due to climate change poses ongoing adaptation challenges. Recommended future adaptation policies include further and continuous investment in vegetation thinning, strategic fire breaks, and improved fire monitoring systems. Real-time monitoring systems significantly enhance early warning capabilities and improve first-response effectiveness. Notably, the Air Now Fire and Smoke Map in the United States exemplifies best global practices by providing real-time, accessible information on current fire and smoke conditions, greatly aiding public preparedness and response efficiency. Importantly, sustainable forest management must prioritize wildfire-resistant forest structures and drought-tolerant tree species to ensure long-term ecosystem resilience and post-fire regeneration capacity.
Source:: IEA and OECD (2024), Climate Hazard Exposure Tracker; Copernicus
Source: Copernicus.
4.3.1. Spain has made significant progress in reducing GHG emissions
4.44. Spain has adopted ambitious decarbonization goals as part of its strategy to transition to a low-carbon, sustainable economy. The 2023-2030 Energy and Climate Plan (PNIEC) sets out goals to reduce greenhouse gas emissions by 32% by 2030 compared to 1990 levels, increase the share of renewables in final energy consumption to 48 %, and improve energy efficiency by at least 43%. Spain’s legally binding commitment to climate neutrality by 2050 targets a 90% reduction in emissions from 1990 levels, with the remaining balance offset by land use, land-use change, and forestry (LULUCF). These commitments are aligned with the European Union Green Deal and the Fit for 55 initiatives.
4.45. The country has made significant progress in reducing greenhouse gas emissions (GHG) over the past decades. Between 2005 and 2023 total GHG emissions (excluding LULUCF) declined by around 38%, outpacing the EU average. Emissions per capita and per unit of GDP have both fallen faster than in most EU economies, reflecting substantial decoupling of emissions from economic growth (Figure 4.9, Panel A). The fall in emissions has been observed across all sectors, particularly energy (Figure 4.10, Panel A). Should emissions continue declining at the same pace, projections suggest Spain will meet its 2050 target (Figure 4.10, Panel B). This progress has been largely driven by the expansion of renewables and the phase out of coal in electricity generation (Figure 4.11). In 2024 renewables represented 26% of all energy sources due to the deployment of solar and wind power, placing Spain among EU leaders in renewable’s share in electricity. Emissions reductions in transport and agriculture have proven more limited (Figure 4.9, Panel B), underscoring the need for stronger policy action beyond the electricity sector.
4.46. Achieving net-zero emissions by 2050 will require more coordinated and cross-sectoral efforts. This includes stronger carbon pricing, accelerated deployment of clean technologies, and greater investment in grid infrastructure, energy efficiency and sustainable mobility (Figure 4.11).
Note: EU-22 refers to OECD EU countries. OECD and EU refer to GDP-weighted averages.
Source: International Energy Agency, OECD calculations; OECD Environment database.
Note: Energy includes UNFCCC reporting categories “Energy Industries”, “Manufacturing and construction (energy)”, "Residential and other sectors (energy)", and “Energy – Other”. BAU refers to “Business as usual” ; LULUCF refers to Land use and land change and forestry.
Source: OECD Environment database; MITECO (2020) Estrategia de descarbonización a largo plazo 2050.
Note: Other renewables include biofuels, geothermal, biomass, and waste energy.
Source: Energy Institute - Statistical Review of World Energy (2025) – with major processing by Our World in Data.
4.3.2. Greening the energy sector
4.47. Energy production remains a critical source of greenhouse gas emissions, accounting for about 45% of national emissions. While renewable electricity has expanded significantly, fossil fuels continue to play a key role in the energy mix, particularly in heating, industrial processes and backup power. To meet the 2030 and 2050 climate goals, Spain will need to continue reducing the carbon intensity of its energy use, including through realigning its tax and subsidy policies to better reflect the environmental and social costs.
Distortive fossil fuel subsidies are still high
4.48. Spain continues to provide several implicit fossil fuel subsidies estimated at around 1.5% of GDP annually (Figure 4.12), mainly through tax exemptions and differentiated tax rates. Diesel is taxed at a lower rate than gasoline despite higher environmental costs, accounting for more than half of implicit subsidies. Refunds for professional diesel use by hauliers and farmers as well as reduced taxation on energy use in agriculture, also limit incentives for fuel efficiency and clean alternatives such as electrification and modal shifts. These measures, while partly motivated by competitiveness concerns, reduce the effectiveness of climate policy.
4.49. Addressing these pricing inconsistencies is essential. Gradually aligning diesel taxation with gasoline, phasing out professional use refunds and reviewing exemptions in line with environmental goals would help internalize environmental costs and incentivize cleaner freight and transport choices. The forthcoming expansion of EU carbon pricing (ETS2) to cover road transport and buildings will strengthen incentives in these sectors. Further measures will be needed to address emissions in agriculture, which remain outside of the ETS (see below). Although emissions from agriculture have stagnated over the past two decades, the increase in production implies that the emissions per output have declined markedly.
4.50. Temporary crisis related measures, such as reduce VAT on natural gas and the Iberian exception for wholesale electricity pricing, which capped the gas input price for electricity generation in Spain and Portugal, were designed to buffer households and firms from extreme price volatility during the 2022-2023 energy crisis. These measures were withdrawn. Going forward policy should focus on durable, well targeted mechanisms that preserve price signals while protecting vulnerable consumers.
Note: Emissions and rates refer to the year 2023. Tax rates relate to road transport while emissions relate to all types of transport.
Source: OECD Net effective carbon rates; OECD air emissions.
4.51. Revenues from energy taxation reform could be recycled to support low-income households through targeted transfers and to fund clean energy investment. Estimates suggest that phasing-out fossil-fuel subsidies and raising effective carbon rates to levels consistent with a net-zero pathway would cut Spain’s energy-related CO₂ emissions by about 15 % by 2030 and yield an additional 1-1.25% of GDP in fiscal revenue during 2026-30, declining thereafter as emissions fall (Guillemette and Château, 2023[36]). The same policy package is also estimated to prevent 1400 pollution related deaths annually (IMF, 2024[37]).
Further integrating renewables for a reliable and cost-effective energy transition
4.52. Spain has made remarkable progress in expanding renewable electricity, positioning itself among European leaders in solar and wind deployment. Between 2018 and 2023, installed solar photovoltaic capacity increased fivefold and by 2023, renewables accounted for over 50% of annual electricity generation. This transition has significantly reduced the carbon intensity of power generation and supports Spain’s climate goals, while fostering the economy competitiveness, including a legally binding target of net-zero emissions by 2050. The updated National Energy and Climate Plan (PNIEC) sets even more ambitious targets for 2030, including 76 GW of solar PV and 62 GW of wind capacity.
4.53. Spain’s electricity demand is projected to rise by more than 40% by 2030, driven by electrification of transport, industry, and heating, as well as a surge in data centre development and green hydrogen projects (McKinsey, 2024[38]). This growth reinforces the need for timely investments in grid infrastructure, storage, and system flexibility to ensure a reliable and affordable transition. The PNIEC estimates that the investments to achieve its objectives will amount to EUR 308 billion with 37% devoted to renewables, 28% to energy efficiency and savings, 17% to grids, 17% to electrification and 1% to others. The Government has presented a plan to invest EUR 13.6 billion in the transmission network by 2030, including upgrades to 21% of the grid and new transmission corridors, with the aim to integrate renewables and storage while limiting curtailment to 3.3% by the end of the decade. Demand for new renewable installations are aligned with the renewable targets set for 2030.
4.54. Permits have already been approved for 86 GW of new solar PV capacity and nearly 27 GW of wind power. The latest transmission network plan ensures that these renewable project requests are aligned with Spain’s 2030 targets. However, maintaining the pace of renewable expansion is becoming more challenging. In January 2025, Spain has around 32 GW of installed capacity for each solar and wind, for a total of 85 GW of renewable installed capacity (Red Electrica Espanola, 2025[39]). The country is progressing well but must sustain its strong installation rates to meet the National Energy and Climate Plan (PNIEC) target of 160 GW of total installed renewable by the end of 2030. Spain needs to add about 75 GW of new renewable energy — averaging about 12.5 GW per year for the 2025-2030 period. Installed capacity is projected in the PNIEC to reach, in 2030, 62GW for wind and 76 GW for solar. To reach this objective, annual installation rates would need to increase to around 5 GW annually for wind and 7GW annually for solar. Permitting delays —particularly at the regional level could limit this expansion. Public opposition to large-scale projects, particularly in rural areas, has also intensified, highlighting the need for improved spatial planning and community engagement. Spain recently approved measures such as accelerated permitting for electricity storage including co-location in existing renewable plants. Although Spain managed until recently to combine high renewable shares with limited curtailment (International Energy Agency, 2024[40]), grid congestion and midday solar curtailment is rising in the second half of 2025, from levels around 2% to values above 10% (Red Electrica Espana, 2025[41]), especially in areas with high renewable potential.
4.55. From a system perspective, Spain faces growing issues around flexibility and balancing. The increasing share of solar and wind generation introduces greater variability in electricity supply. Without adequate investment in storage capacity and demand-side flexibility, this variability can heighten dependence on gas fired plants during periods of low renewable output. Spain has recently launched EUR 700 million in grants to boost large-scale energy storage with the potential to add up to 3.5 GW of new capacity, complementing more than 4 GW already awarded under the Recovery Transformation and Resilience Plan. Spain is introducing regulations to promote storage hybridization in existing plants and launching a public hydropower plan. While progress is underway, deployment of battery storage remains limited, and incentives for flexible consumption, such as time use pricing or load shifting, are still underdeveloped.
4.56. Electricity pricing structures also affect system efficiency. Flat retail tariffs and limited locational price signals reduce the economic incentives for consumers and producers to respond to system needs. In parallel, support schemes such as contracts-for-difference (CfDs) insulate some renewable producers from real-time market prices. While CfDs help reduce investor risk and financing costs, they may also limit responsiveness to supply–demand conditions, contributing to curtailment and placing fiscal pressure on support budgets. Paying for curtailed energy weakens incentives to locate projects in grid-constrained areas and increases system integration costs.
4.57. Estimates suggest that grid integration costs for variable renewables rise significantly as their share increases—starting around EUR 25–35 per MWh at low penetration levels and growing at higher shares (IEA, 2024[42]; Heptonstall and Gross, 2020[43]). Ensuring that producer incentives reflect the marginal system value of electricity—such as through more dynamic pricing or improved locational signals—can help mitigate these costs.
4.58. Spain’s growing weather dependency in electricity production also requires enhanced system resilience. Wind and solar output can vary substantially within hours and across seasons. Spain has introduced a voluntary demand response mechanism (SRAD), which allows large electricity consumers to temporarily reduce their consumption when the electricity system is under stress. While promising, its uptake and role remains limited so far. Enhancing system flexibility, including through grid upgrades, storage, and demand-side management, will be essential to avoid similar challenges in the future. Ensuring effective coordination between the system operator (REE), MITERD, and the CNMC will also be key to managing supply risks and ensuring the system operators have access to appropriate tools and signals.
4.59. Following energy sector reforms in the early 2010s, Spain introduced limits on grid investment by transmission and distribution operators. While these measures addressed previous financial imbalances, the resulting caps —fixed as a share of GDP— have not been adjusted to reflect growing electrification and integration needs. However, the grid owners have not reached the investment level cap in the last years according to the electricity regulator (CNMC). Over the past decade, grid expansion has not kept pace with the rapid deployment of renewable energy. As a consequence of the investment cap, Spain has the lowest ratio of grid spending to renewable investment in Europe: over 2010–2023, only about EUR 0.30 was invested in networks for every MWh invested in renewables, roughly half the ratio of EUR 0.70 seen in most European countries (Bloomberg NEF, 2025[44]). In several regions, connection bottlenecks and delayed project approvals have become a key constraint for both consumers and producers. Given these bottlenecks, investors now rate grid access risk in Spain as one of the highest in western Europe, which lifts the weighted-average cost of capital for clean-energy projects (McKinsey, 2024[38]). Strengthening the regulatory framework to enable forward-looking, needs-based investment — including anticipatory grid planning and improved coordination across governance levels — will be critical to support Spain’s climate goals and energy security. The electricity regulator (CNMC) has recently proposed - currently under public consultation - an increase in the allowed financial rate of return. In parallel, MITERD has proposed a draft Royal Decree on grid investment, that maintains the GDP based caps but adds an annual increase for 2026-30.
4.60. Battery storage deployment in Spain has lagged peers due to relatively low price-volatility, regulatory barriers such as double grid charges, and the absence of long-term revenue mechanisms. While existing hydro already provides important flexibility, the system’s growing need for short duration balancing and fast ramping suggests that storage will become increasingly valuable. Experiences from markets like California and Texas highlight different models — one regulatory, one market-driven — for fostering battery investment, though these approaches reflect different structural conditions. Spain can draw lessons while designing a framework suited to its own grid, market and policy goals.
4.61. Maintaining system reliability as renewable penetration increases will require adequate provision of all relevant grid services, including voltage control, frequency response and inertia which play a critical role in stabilising frequency and ensuring system resilience. In October 2025, the system operator Red Electrica requested the electricity regulator (CNMC) specific operational modifications aimed at mitigating sudden voltage fluctuations. The operator noted rapid voltage fluctuations across the Spanish mainland grid, attributing them to sudden changes in generation schedules—especially from self-consumption and the high concentration of renewable installations in certain areas, which can trigger swift and significant power swings—as well as to the response times of generators responsible for dynamic voltage control (CNMC, 2025[45]). Policy tools to effectively maintain system reliability and mitigate sudden voltage fluctuations include market-based mechanisms such as dedicated markets for system services (e.g. fast frequency response and system strength), as well as operational mandates with appropriate compensation. Countries such as Ireland and the United Kingdom have developed targeted frameworks to maintain grid stability alongside high shares of renewables. Ensuring that investment frameworks provide stable and predictable signals for firm and flexible capacity will also support long-term system adequacy. In this area, the Spanish regulator (CNMC) recently modified regulation PO 7.4 remunerating voltage control services provided by renewable sources like solar and wind, after testing the regulation in different sandboxes.
4.62. Improving cross-border interconnections, particularly with France, remains essential to increase system flexibility and integrate Spain’s growing share of renewable electricity. Spain’s current electricity interconnection capacity remains below the EU target of 15% of installed generation, limiting its ability to export surplus renewable power and access balancing capacity and grid services from neighbouring markets. Strengthening interconnection infrastructure would help reduce renewable curtailment, improve price convergence, and enhance energy security. Ongoing projects — including the Biscay Gulf subsea cable — are important steps, but permitting and cross-border coordination challenges have led to delays. Accelerating these investments will be important to support both Spain’s national goals and broader EU market integration.
4.63. A more flexible and resilient system also requires better price signals. Gradually introducing more granular time-of-use tariffs and, eventually, real-time locational pricing would help align producers and consumers behaviour with system needs. Locational pricing could reduce congestion and support renewable deployment in underutilised areas of the grid.
4.64. Addressing these system-wide issues is essential not only to maintain the environmental benefits of renewables, but also to ensure affordability and energy security. Spain’s experience is similar to that of other high-renewables countries — such as Germany, Denmark and Ireland — where the next stage of the transition hinges less on capacity additions and more on integration, infrastructure, and flexibility.
4.65. Nuclear power can contribute to improving energy security, and nuclear electricity production is more stable over time compared to intermittent renewables while also being low-carbon, although concerns involve nuclear fuel availability and price, as well as high-impact negative risks in case of severe nuclear accidents, and the need to manage nuclear waste. It is important for nuclear projects, as well as any other energy project, to be underpinned by transparent and comprehensive life-cycle cost-benefit analyses that inter alia account for the cost of constructing power plants, storing nuclear waste, and decommissioning disused power plants. Such analysis must also consider the direct and indirect subsidies granted throughout the production cycle.
4.66. Spain’s current strategy envisages a gradual phase-out of nuclear generation between 2027 and 2035. As this transition unfolds, ensuring system adequacy, affordability, and resilience through complementary investment in clean and flexible generation will be critical. This will depend on timely investments in clean dispatchable and flexible sources of electricity, as well as continued improvements in grid infrastructure and storage capacity. The withdrawal of around 7 GW of firm, low carbon capacity, will increase reliance on other sources, including on renewables and storage, while national estimates in the PNIEC suggest that natural gas use will be halved by 2030. According to Spain’s energy plan and assessments by the electricity system operator, the country electricity supply is expected to remain secure even as nuclear power is phased out. A recent European study by ENTSO-E confirms that adequacy risk for Spain is lower than in most other EU countries in 2030 and 2035, even with the planned nuclear phase out (ENTSOE, 2024[46]).
Following Russia’s war of aggression against Ukraine, the EU has sought to reduce energy imports from Russia through the 2022 RePowerEU plan. With the drop in pipeline gas imports, EU imports of liquefied natural gas (LNG) from Russia increased – including in Spain. In 2024, Russia became the second-largest supplier of natural gas to Spain, accounting for 21% of its imports, while Algeria was the top supplier with 39%. In the first ten months of 2025 the share of Russian gas entering Spain went down to 11%, positioning that supplier behind Algeria (34%) and the United Sates (32%). In the same period, thanks to six regasification plants, Spain reexported 12% of its natural gas imports via pipeline to the rest of Europe and Morocco.
Source: Enagas, Boletín Estadístico del Gas en España.
4.3.3. The cost-effectiveness of decarbonising transport can still be improved
4.67. Transport remains one of the largest sources of greenhouse gas emissions in Spain, accounting for nearly 31% of total emissions, a share significantly above the OECD and EU average of 24%. Most of these emissions come from road transport, in particular private vehicles and freight. Total emissions from transport have declined significantly, by 16% since their peak in 2007, faster than the EU decline of 7%. The decline has been even steeper on a per capita basis and per kilometre travelled. However, some of the decline was compensated by higher travel demand per person, rising vehicle ownership, a rising and wealthier population and the continued expansion of tourism.
4.68. Spain’s national energy and climate plan sets the target of reducing transport emissions by 42% by 2030 compared to 2005 levels, but current trends suggest that this will be difficult to achieve without more decisive action. A longer-term framework and a comprehensive strategy are needed to continue the decarbonisation path. Given the sector’s high dependence on fossil fuels, and slow speed of fleet renewal, it remains one where the decarbonization timeframe is set to take longer. A cost-effective transition will require a combination of near-term pricing reforms and long-term investment strategies supporting better spatial planning and sustained investments in structural low-carbon transport infrastructure.
4.69. Car use remains dominant for both passengers and freight, with a limited shift towards public transport or rail. At the same time Spain’s vehicle fleet remains one of the oldest and most polluting in Europe, with nearly half of all cars (48.8%), exceeding 15 years old and diesel vehicles (which emit more) still dominating and accounting for 60% of the fleet. Spain’s current freight rail freight share (4%) is among the lowest in Europe, and fragmented infrastructure and limited electrification hinder its competitiveness. A shift to interoperable and electrified rail freight is essential to reduce long haul emissions, improve energy efficiency and meet the EU modal shift targets. Addressing these gaps is key to decarbonising logistics and alleviating pressure on road networks.
4.70. Although effective carbon rates are the highest for the transport sector, emissions have not declined faster due to rising transport demand that partially compensated the efficiency gains in emissions per km travelled. While subsidies for electric vehicles have expanded, these co-exist with generous diesel rebates, sending contradictory signals to consumers and firms, making the shift towards cleaner transport less effective. Road freight continues to benefit from fuel tax exemptions, as discussed above, delaying the transition to rail and electrified logistics. Diesel remains taxed at a lower rate than petrol, as discussed before, despite its higher climate and air pollution costs. Fiscal incentives for clean vehicles coexist with large implicit subsidies for fossil fuel use, especially in freight. Spain applies a CO₂-based registration tax (IEDMT), levying higher rates (from 4.75% to 14.75%) on more polluting vehicles, while fully exempting battery-electric vehicles (BEVs).
4.71. Subsidies to public transport are one of the main tools for greening transport. Spain has recently increased its public subsidies, spending around EUR3.4 billion in fare subsidies between 2023 and 2024, cutting or eliminating ticket prices on suburban rail, regional services and many municipal networks. While these discounts yielded an immediate increase in public-transport use, some evidence suggests that long-run modal shift is driven more by service quality than by ticket cost: a recent European meta-study finds that increasing frequency raises ridership roughly twice as much as an equivalent fare cut (Brechan, 2017[47]). Supply-side grants begin to move in that direction but remain comparatively modest. The PATSYD programme has allocated €460 million (2022–24) for low-carbon logistics corridors, fleet renewal and digitalisation, and the rail-freight eco-incentive provides €75 million to reward shippers that switch from road to rail or short-sea routes.
4.72. Spain’s main policy instrument to promote low carbon private transport is a subsidy programme for EV purchases (MOVES III). The programme provides generous purchase subsidies (EUR 4,500–EUR 7,000 for private buyers and up to EUR 5,000 plus tax advantages for companies and private buyers) aiming to achieve a 40% EV share in new car sales by 2030, with a cost of 400 million euros annually. Given high reliance on passenger car transport, which is expected to remain the dominant transport mode over the following decades, accelerating fleet greening is key to cut transport emissions. Besides providing a dense charging infrastructure and strengthening incentives to phase-out internal combustion engine vehicles, e.g. through zero emission zones, EV subsidies are frequently used to accelerate fleet greening. However, EV subsidies are fiscally expensive, with evidence suggesting that they disproportionately benefit higher income households who may often choose to switch to EV cars also without subsidies. Still, despite a narrowing price gap, EVs remain more expensive compared to internal combustion engine cars, suggesting that high upfront costs remain an obstacle especially for lower income households. Targeting EV subsidies can improve their cost-effectiveness. Given high fiscal costs, subsidies should be regularly evaluated for their cost-efficiency. Moreover, the emission benefits of EV depend on the carbon intensity of electricity used for charging. Expanding the charging infrastructure for EVs will be key to boost uptake. Despite progress, Spain’s charging infrastructure remains limited compared to other OECD countries, with only 1 charging point per 1000 registered cars in 2024 (Figure 4.13). Additional public support, such as targeted subsidies or tax incentives and simplified permitting, could accelerate infrastructure rollout and ensure alignment with the pace of fleet electrification.
4.73. Accelerating the decarbonisation of transport will require a coherent and long-term strategy, including stepping up infrastructure investment for low-carbon transportation (Figure 4.14), the alignment of carbon taxes for fuels, expansion of charging infrastructure and stricter emission standards for vehicles. First, raising diesel excise duties and phasing out professional rebates would strengthen incentives for fleet removal and modal shift, as discussed above. Second, rather than continuing broad based EV subsidies a cost-efficient approach would rely on, emission-indexed fuel charges, distance-based road pricing and carbon pricing. These tools can deliver immediate behavioural responses and raise revenue to support complementary investments. Strengthening public transport will be key to reducing transport emissions by shifting transport off the road.
4.74. Beyond vehicle level policies, spatial planning is critical to reducing transport demand. In many cities, housing shortages lead workers into long commutes and car dependency. Integrating housing development with high-capacity public transport corridors would reduce car travel and lower emissions. Densifying around transit nodes and expanding cycling infrastructure offer high returns, both economically and environmentally.
Note: Panel A: Explicit excludes the producer portion of explicit subsidies.
Source: (Black, Antung and Parry, 2023[48]).
Number of recharging points per 1000 of registered passenger cars, 2024
Note: Data for recharging points refer to 2024Q1; data for registered passenger cars refer to 2023.
Source: OECD calculations based on Eurostat (2024) and EAFO (2024).
Source: OECD estimates based on related literature.
4.3.4. Reducing buildings’ emissions requires a long-term strategy
4.75. Energy-use in residential and service-sector buildings – mainly for space and water heating - account for roughly one-third of national CO₂ emissions. Emissions in buildings have decreased by almost 30% since their peak in 2010, a considerable decline given Spain’s rising population (Figure 4.15). Spain has one of the lowest values of final energy consumption in households per square meter in the EU, only above Malta, Portugal and Cyprus (Eurostat). Heating accounts for about 42% of residential energy, while cooling needs are rising steadily. The energy demand is primarily met by natural gas, electricity, and biomass. Spain's climate provides opportunities to implement passive cooling strategies and electrification of heating, essential for a cost-effective decarbonisation pathway over the very long term. Spain seeks to abate building’s emissions by applying a full life-cycle approach. First, renovation of both buildings and their systems reduces energy needs and emissions at the same time, while integration of renewable energy through self-consumption and electrification, and the decarbonization of the electricity system completes emissions abatement. Additionally, using low-carbon footprint materials will be important in new buildings.
4.76. Several barriers complicate Spain’s efforts to decarbonize its buildings sector. Older Spanish buildings typically have poor thermal efficiency and rely heavily on fossil fuels, requiring major technological shifts. If the current rate of reduction in primary energy consumption within the building sector is sustained, it would enable compliance with the 16% and 26% reduction targets established by the EU directives for 2030 and 2035, respectively. Nevertheless, achieving climate neutrality by 2050 will require a significant acceleration in the energy renovation of the existing building stock. Mobilising substantial upfront investments, addressing split incentives between landlords and tenants, and developing a skilled renovation workforce remain critical challenges. Additionally, fragmented ownership structures in buildings complicate the adoption of innovative decarbonisation measures.
Emissions from the residential sector, index 2000 = 100
Note: Data refer to the UNFCCC reporting category "Residential and other sectors (energy)".
Source: OECD Environment database.
4.77. Spain has implemented several important reforms aligned with EU directives, including strengthening the Technical Building Code in 2019 to enforce near-zero-energy standards for new constructions. The Long-Term Building Renovation Strategy (ERESEE) and National Energy and Climate Plan (NECP) prioritise efficiency improvements, supported by Spain’s Recovery and Resilience Plan. To stimulate faster technological transitions, particularly regarding heating electrification, further policy measures could be considered. A comparative marginal abatement cost analysis suggests that electrifying heating via heat pumps and adopting passive cooling designs offer economically attractive decarbonisation pathways. By contrast, recent research indicates that traditional weatherisation and insulation interventions often fail to achieve anticipated energy savings.
4.78. Given a long-term perspective beyond 2100, Spain should prioritise establishing stringent, future-proof zero-carbon standards for all new buildings, ensuring new constructions have minimal operational and embodied emissions. Policy emphasis should shift significantly toward electrification of space and water heating, supported by incentives such as substantial rebates and preferential financing for heat pump adoption, particularly in areas heavily reliant on fossil fuels. Urban planning policies should also be leveraged by promoting higher-density, multi-family residential developments, as apartment buildings generally yield lower per-capita emissions compared to detached homes, even considering that Spain is one of the countries of the EU with most people living in shared buildings. Market-based instruments, notably participation in the EU’s buildings emissions trading scheme (ETS2), should direct revenue explicitly toward supporting heating electrification and urban densification.
4.3.5. Reducing emissions and enhancing carbon sinks in agriculture
4.79. Agriculture plays a dual role in Spain’s climate agenda, acting both as a significant source of greenhouse gas emissions and a potential contributor to carbon sequestration through land use, land-use change and forestry (LULUCF). In 2023, the sector accounted for approximately 12.2% of total GHG emissions, resulting in a 2.1% reduction in emissions compared to 2022. These emissions are largely from methane released by livestock and nitrous oxide (N20) emissions from fertilizer use and manure management.
4.80. At the same time, land use practices, particularly on cropland and marginal land, present a significant opportunity to strengthen carbon sinks. Spain’s forest cover has increased over the past decades, contributing to a net improvement in emissions and land use, land-use change, and forestry (LULUCF) has become a growing net carbon sink. However, beyond forest areas, carbon sequestration on agricultural and marginal lands remains underused. Soil degradation and desertification trends in parts of the country are reducing the potential contribution of soils as a carbon sink. Since the 1980s, soil organic carbon (SOC) stocks have markedly declined due to a combination of climatic pressures—rising temperatures and recurrent droughts—and agricultural practices, including the type of farming practices and overgrazing (IPCC, 2019[49]). Declining carbon sink capacity in countries such as Finland, Slovenia and Croatia highlights the risk of relying on LULUCF. Spain may need to reduce emissions even more aggressively than the current 90% target for 2050. Studies suggest that SOC levels in agricultural lands, critical carbon sinks, have decreased by 17%, a reduction from historical peaks (Aguilera et al., 2018[50]). Desertification exacerbates this decline by eroding topsoil and reducing the land’s capacity to sequester carbon, ultimately turning soils from carbon sinks into net sources of CO₂ emissions. Addressing soil carbon depletion is critical for Spain’s climate mitigation objectives and its long-term agricultural productivity.
4.81. Desertification, affecting over 70% of Spanish territory to varying degree, further compounds the problem by degrading topsoil and reducing the land’s ability to retain carbon. As desertification advances, previously carbon storing soils may become net sources of CO2. This trend underscores the urgency of adopting climate smart land management practices.
4.82. Several national and EU level instruments seek to address these challenges. Spain’s national energy and climate plan (PNIEC) identifies soil conservation and land restoration as mitigation priorities. The EU Common Agricultural Policy (CAP) now aligned with the EU Green Deal, offers incentives for conservation, agriculture, organic farming, agroforestry and reduced fertilizer use. However, implementation varies across regions, with insufficient incentives to adopt sustainable practices widely, especially among smallholder farms. Spain’s 2023-27 CAP strategic plan gives direct transfers to farmers that engage in no-till farming (siembra directa) and in cover cropping with the aim to further decarbonize agriculture.
4.83. To increase the contribution of agriculture to climate mitigation in a cost effective and balance way Spain could consider several additional options. First, reducing non-CO2 emissions by promoting improved manure and fertilizer management, optimizing livestock feed, and encouraging low emission farming techniques. Second, enhancing soil carbon sequestration through expanded adoption of no-till farming and extensive cover cropping. The 2023-27 CAP Strategic Plan channels 25 % of direct payments into eco-schemes such as siembra directa and winter cover vegetation, offering stable finance for these practices. These practices require minimal upfront investment, quickly improve soil health, and are cost-neutral or even profitable in the medium term (IPCC, 2022[51]). Third, rehabilitating degraded and abandoned land via afforestation, agricultural restauration. The 2022 Biogas Roadmap, backed by NextGenerationEU funds, supports farm-scale digesters that turn manure into renewable energy and nutrient-rich digestate for soil restoration. Fourth, improving measurement and monitoring systems for soil carbon and non-CO2 emissions to support results-based payments and targeted policy action. On that front, the Ministry of Agriculture has begun a nationwide soil-carbon baseline survey to prepare a future certification scheme. Policy coordination at regional and national levels is crucial to ensure coherence and effectiveness of these measures. A recent example is the ECOGAN digital platform, adopted by 93% of animal census and two-thirds of poultry farms, which registers BAT implementation and has already delivered a 16.7% cut in ammonia in 2023—and associated nitrous-oxide—emissions, illustrating the value of robust, farm-level data systems.
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