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Climate transition spillovers and sovereign risk: Evidence from Indonesia

Author

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  • Gourdel, Régis
  • Monasterolo, Irene
  • Gallagher, Kevin

Abstract

We analyze the impacts of climate transition spillover risk on fiscal sustainability and sovereign risk in Indonesia. Spillover risk emerges from the introduction of energy decarbonization policies by Indonesia’s main trading partners, such as China. Spillover risk is modeled as a demand shock for Indonesia’s fossil fuels that affects its exports, building on the Network for Greening the Financial System’s scenarios. By tailoring the EIRIN Stock-Flow Consistent model, we quantify the impact of spillover risk on the Indonesian economy, on the sovereign fiscal and financial dimensions. We find that spillover risk weakens the Indonesian balance of payment, leading to indirect and cascading effects on public finance and public debt, which increases by up to 23 percent of GDP by 2050. Thus, potential trade-offs between energy decarbonization and sovereign financial stability could emerge, along with the materialization of carbon-stranded assets. Our results highlight the importance of coordinated climate policy introduction. They also bring out the importance to include spillover risks in the climate financial risk monitoring and assessment programs of national and international supervisory authorities (e.g. the Debt Sustainability Analyses and Financial Stability Assessment Programmes of the International Monetary Fund) for better risk management and climate policy design.

Suggested Citation

  • Gourdel, Régis & Monasterolo, Irene & Gallagher, Kevin, 2025. "Climate transition spillovers and sovereign risk: Evidence from Indonesia," Energy Economics, Elsevier, vol. 143(C).
  • Handle: RePEc:eee:eneeco:v:143:y:2025:i:c:s0140988325000349
    DOI: 10.1016/j.eneco.2025.108211
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    Keywords

    Climate transition spillover risks; Network for Greening the Financial System scenarios; Balance of payment; Sovereign risk; Stock-Flow Consistent model; Fossil fuels;
    All these keywords.

    JEL classification:

    • B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • N75 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services - - - Asia including Middle East
    • P18 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Energy; Environment

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