Feeling the Heat: Climate Risks and the Cost of Sovereign Borrowing

23 Pages Posted: 22 Jul 2020

See all articles by John Beirne

John Beirne

Asian Development Bank Institute

Nuobu Renzhi

Asian Development Bank Institute

Ulrich Volz

University of London - School of Oriental and African Studies (SOAS) - Economics; Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE)

Date Written: June 30, 2020

Abstract

We empirically examine the link between the cost of sovereign borrowing and climate risk for 40 advanced and emerging economies. Controlling for a large set of domestic and global factors, we show that both vulnerability and resilience to climate risk are important factors driving the cost of sovereign borrowing at the global level. Overall, we find that vulnerability to the direct effects of climate change matter substantially more than climate risk resilience in terms of the implications for sovereign borrowing costs. Moreover, the magnitude of the effect on bond yields is progressively higher for countries deemed highly vulnerable to climate change. Impulse response analysis from a set of panel structural VAR models indicates that the reaction of bond yields to shocks imposed on climate vulnerability and resilience become permanent after around 12 quarters, with high risk economies experiencing larger permanent effects on yields than other country groups.

Keywords: climate risk, cost of sovereign borrowing

JEL Classification: F32, F41, F62

Suggested Citation

Beirne, John and Renzhi, Nuobu and Volz, Ulrich, Feeling the Heat: Climate Risks and the Cost of Sovereign Borrowing (June 30, 2020). ADBI Working Paper 1160, Available at SSRN: https://ssrn.com/abstract=3657114 or http://dx.doi.org/10.2139/ssrn.3657114

John Beirne (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F 3-2-5
Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

Nuobu Renzhi

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

Ulrich Volz

University of London - School of Oriental and African Studies (SOAS) - Economics

London, WC1E 7HU
United Kingdom

Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE) ( email )

Tulpenfeld 4
Bonn, 53113
Germany

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