The Risks from Climate Change to Sovereign Debt

Climatic Change (Forthcoming)

31 Pages Posted: 24 Jul 2021 Last revised: 16 May 2022

See all articles by Stavros A. Zenios

Stavros A. Zenios

University of Cyprus; Bruegel; University of Pennsylvania - Wharton Financial Institutions Center; Cyprus Academy of Sciences, Letters, and Arts

Date Written: July 15, 2021

Abstract

The exposure of sovereigns to climate risks is priced and can affect credit ratings and debt servicing costs. I argue that the climate risks to fiscal stability are not receiving adequate attention and discuss how to remedy the situation. After providing evidence of divergent climate risks to advanced economies, I describe the transmission channels from climate change to public finance. Then I suggest how integrated assessment models (IAM) can be linked with stochastic debt sustainability analysis (DSA) to inform our understanding of climate risks to sovereign debt dynamics and assess the available fiscal space to finance climate policies. I argue for adopting the narrative scenario architecture developed within the IPCC to bring structure and transparency to the analysis. The analysis is complicated by deep uncertainty—risks, ambiguity, and mis-specifications—of climate change. Using scenario trees, narrative scenarios, and ensembles of models, respectively, we can deal with the three issues. I illustrate using two prominent IAM to generate the debt dynamics of a high-debt country under climate risks to economic growth and find adverse effects from as early as 2030. I conclude with policy implications for fiscal stability authorities.

Keywords: climate change; sovereign debt; sustainability; adaptation; mitigation; integrated assessment models

JEL Classification: E62, H12, H63, H68, Q50, Q54, Q58

Suggested Citation

Zenios, Stavros A., The Risks from Climate Change to Sovereign Debt (July 15, 2021). Climatic Change (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3891078 or http://dx.doi.org/10.2139/ssrn.3891078

Stavros A. Zenios (Contact Author)

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893605 (Phone)

HOME PAGE: http://https://www.researchgate.net/profile/Stavros_Zenios

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

HOME PAGE: http://zenios.wordpress.com

Cyprus Academy of Sciences, Letters, and Arts ( email )

Nicosia
Cyprus

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