IDEAS home Printed from https://ideas.repec.org/a/spr/climat/v172y2022i3d10.1007_s10584-022-03373-4.html
   My bibliography  Save this article

The risks from climate change to sovereign debt

Author

Listed:
  • Stavros A. Zenios

    (University of Cyprus
    Cyprus Academy of Sciences, Letters and Arts
    Bruegel)

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 (IAMs) 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 these three challenges. I illustrate using two prominent IAMs 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 the policy implications for fiscal stability authorities.

Suggested Citation

  • Stavros A. Zenios, 2022. "The risks from climate change to sovereign debt," Climatic Change, Springer, vol. 172(3), pages 1-19, June.
    • Handle: RePEc:spr:climat:v:172:y:2022:i:3:d:10.1007_s10584-022-03373-4
    DOI: 10.1007/s10584-022-03373-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10584-022-03373-4
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10584-022-03373-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Patrycja Klusak & Matthew Agarwala & Matt Burke & Moritz Kraemer & Kamiar Mohaddes, 2023. "Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness," Management Science, INFORMS, vol. 69(12), pages 7468-7491, December.
    2. Marshall Burke & Solomon M. Hsiang & Edward Miguel, 2015. "Global non-linear effect of temperature on economic production," Nature, Nature, vol. 527(7577), pages 235-239, November.
    3. Richard S. J. Tol, 2014. "Correction and Update: The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 28(2), pages 221-226, Spring.
    4. Kahn, Matthew E. & Mohaddes, Kamiar & Ng, Ryan N.C. & Pesaran, M. Hashem & Raissi, Mehdi & Yang, Jui-Chung, 2021. "Long-term macroeconomic effects of climate change: A cross-country analysis," Energy Economics, Elsevier, vol. 104(C).
    5. Dafermos, Yannis & Nikolaidi, Maria & Galanis, Giorgos, 2018. "Climate Change, Financial Stability and Monetary Policy," Ecological Economics, Elsevier, vol. 152(C), pages 219-234.
    6. Batten, Sandra, 2018. "Climate change and the macro-economy: a critical review," Bank of England working papers 706, Bank of England.
    7. Robert J. Lempert & David G. Groves & Steven W. Popper & Steve C. Bankes, 2006. "A General, Analytic Method for Generating Robust Strategies and Narrative Scenarios," Management Science, INFORMS, vol. 52(4), pages 514-528, April.
    8. Runkel, Marco & Kellner, Maximilian, 2018. "Climate Policy and Optimal Public Debt," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181639, Verein für Socialpolitik / German Economic Association.
    9. Francesco Lamperti & Valentina Bosetti & Andrea Roventini & Massimo Tavoni, 2019. "The public costs of climate-induced financial instability," Nature Climate Change, Nature, vol. 9(11), pages 829-833, November.
    10. Mr. Serhan Cevik & João Tovar Jalles, 2020. "This Changes Everything: Climate Shocks and Sovereign Bonds," IMF Working Papers 2020/079, International Monetary Fund.
    11. Zsolt Darvas & Guntram B. Wolff, 2021. "A green fiscal pact- climate investment in times of budget consolidation," Policy Contributions 44540, Bruegel.
    12. Melissa Dell & Benjamin F. Jones & Benjamin A. Olken, 2014. "What Do We Learn from the Weather? The New Climate-Economy Literature," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 740-798, September.
    13. William Nordhaus, 2019. "Climate Change: The Ultimate Challenge for Economics," American Economic Review, American Economic Association, vol. 109(6), pages 1991-2014, June.
    14. Kalkuhl, Matthias & Wenz, Leonie, 2020. "The impact of climate conditions on economic production. Evidence from a global panel of regions," Journal of Environmental Economics and Management, Elsevier, vol. 103(C).
    15. Maria Demertzis & Stavros A Zenios, 2019. "State Contingent Debt as Insurance for Euro Area Sovereigns," Journal of Financial Regulation, Oxford University Press, vol. 5(1), pages 64-90.
    16. Robert S. Pindyck, 2017. "The Use and Misuse of Models for Climate Policy," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(1), pages 100-114.
    17. John Weyant, 2017. "Some Contributions of Integrated Assessment Models of Global Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(1), pages 115-137.
    18. Bryan Kelly & Ľuboš Pástor & Pietro Veronesi, 2016. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," Journal of Finance, American Finance Association, vol. 71(5), pages 2417-2480, October.
    19. Paolo Gazzotti & Johannes Emmerling & Giacomo Marangoni & Andrea Castelletti & Kaj-Ivar van der Wijst & Andries Hof & Massimo Tavoni, 2021. "Persistent inequality in economically optimal climate policies," Nature Communications, Nature, vol. 12(1), pages 1-10, December.
    20. Martin L. Weitzman, 2011. "Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(2), pages 275-292, Summer.
    21. Arjuna Dibley & Thom Wetzer & Cameron Hepburn, 2021. "National COVID debts: climate change imperils countries’ ability to repay," Nature, Nature, vol. 592(7853), pages 184-187, April.
    22. Lint Barrage, 2020. "Optimal Dynamic Carbon Taxes in a Climate–Economy Model with Distortionary Fiscal Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(1), pages 1-39.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. João Tovar Jalles, 2024. "Financial Crises and Climate Change," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 66(1), pages 166-190, March.
    2. Phemelo Tamasiga & Malesela Molala & Malebogo Bakwena & Hugue Nkoutchou & Helen Onyeaka, 2023. "Is Africa Left behind in the Global Climate Finance Architecture: Redefining Climate Vulnerability and Revamping the Climate Finance Landscape—A Comprehensive Review," Sustainability, MDPI, vol. 15(17), pages 1-26, August.
    3. Di Tommaso, Caterina & Foglia, Matteo & Pacelli, Vincenzo, 2023. "The impact and the contagion effect of natural disasters on sovereign credit risk. An empirical investigation," International Review of Financial Analysis, Elsevier, vol. 87(C).
    4. Naifar, Nader, 2024. "Spillover among Sovereign Credit Risk and the Role of Climate Uncertainty," Finance Research Letters, Elsevier, vol. 61(C).
    5. Angela Köppl & Stefan Schleicher & Margit Schratzenstaller, 2023. "Klima- und umweltrelevante öffentliche Ausgaben in Österreich," WIFO Working Papers 655, WIFO.
    6. Damette, Olivier & Mathonnat, Clément & Thavard, Julien, 2024. "Climate and sovereign risk: The Latin American experience with strong ENSO events," World Development, Elsevier, vol. 178(C).
    7. Caterina Seghini & Stéphane Dees, 2024. "The Green Transition and Public Finances," Working papers 949, Banque de France.
    8. Yuqin Zhou & Shan Wu & Zhenhua Liu & Lavinia Rognone, 2023. "The asymmetric effects of climate risk on higher-moment connectedness among carbon, energy and metals markets," Nature Communications, Nature, vol. 14(1), pages 1-16, December.
    9. Peter von zur Muehlen, 2022. "Prices and Taxes in a Ramsey Climate Policy Model under Heterogeneous Beliefs and Ambiguity," Economies, MDPI, vol. 10(10), pages 1-56, October.
    10. Lee, Chien-Chiang & Wang, Chih-Wei & Thinh, Bui Tien, 2023. "Green development, climate risks, and cash flow: International evidence," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    11. Assoumou-Ella, Giscard & Nkah-Ella, Cédric, 2024. "Climate change, governance, and macroeconomic stability: Empirical analysis in a panel of African countries," Emerging Markets Review, Elsevier, vol. 61(C).
    12. Alessi, Lucia & Battiston, Stefano, 2022. "Two sides of the same coin: Green Taxonomy alignment versus transition risk in financial portfolios," International Review of Financial Analysis, Elsevier, vol. 84(C).
    13. Srdelic, Leonarda, 2024. "Pregled klimatskih projekcija za Hrvatsku i njihovih utjecaja na gospodarstvo i financijski sustav [Overview of climate projections for Croatia and their impact on the economy and financial system]," MPRA Paper 121319, University Library of Munich, Germany.
    14. Maximilian Kellner & Marco Runkel, 2024. "Climate policy and optimal public debt," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(6), pages 1584-1610, December.
    15. Angela Köppl & Margit Schratzenstaller, 2024. "Policy Brief: Budgetäre Kosten und Risiken durch klimapolitisches Nichthandeln und Klimarisiken," WIFO Studies, WIFO, number 70821, January.
    16. Philipp Heimberger, 2023. "Öffentliche Investitionen und Sozialstaat: Perspektiven der Budgetpolitik im Kontext von Energiekrise, Klimawandel und EU-Budgetregeln," wiiw Policy Notes 65, The Vienna Institute for International Economic Studies, wiiw.
    17. Andrea Consiglio & Akis Kikas & Odysseas P. Michaelides & Stavros A. Zenios, 2024. "Auditing Public Debt Using Risk Management," Interfaces, INFORMS, vol. 54(2), pages 103-126, March.
    18. Karydas, Christos & Xepapadeas, Anastasios, 2022. "Climate change financial risks: Implications for asset pricing and interest rates," Journal of Financial Stability, Elsevier, vol. 63(C).
    19. Fentaw Leykun, 2024. "Climate change and external debt vulnerability: the case of Sub-Saharan Africa," Journal of Innovation and Entrepreneurship, Springer, vol. 13(1), pages 1-27, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Joaquín Bernal-Ramírez & Jair Ojeda-Joya & Camila Agudelo-Rivera & Felipe Clavijo-Ramírez & Carolina Durana-Ángel & Clark Granger-Castaño & Daniel Osorio-Rodríguez & Daniel Parra-Amado & José Pulido &, 2022. "Impacto macroeconómico del cambio climático en Colombia," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, issue 102, pages 1-62, July.
    2. Rising, James A. & Taylor, Charlotte & Ives, Matthew C. & Ward, Robert E.T., 2022. "Challenges and innovations in the economic evaluation of the risks of climate change," Ecological Economics, Elsevier, vol. 197(C).
    3. Chang, Jun-Jie & Mi, Zhifu & Wei, Yi-Ming, 2023. "Temperature and GDP: A review of climate econometrics analysis," Structural Change and Economic Dynamics, Elsevier, vol. 66(C), pages 383-392.
    4. Agarwala, Matthew & Burke, Matt & Klusak, Patrycja & Mohaddes, Kamiar & Volz, Ulrich & Zenghelis, Dimitri, 2021. "Climate Change And Fiscal Sustainability: Risks And Opportunities," National Institute Economic Review, National Institute of Economic and Social Research, vol. 258, pages 28-46, November.
    5. Tol, Richard S.J., 2024. "A meta-analysis of the total economic impact of climate change," Energy Policy, Elsevier, vol. 185(C).
    6. Desbordes, Rodolphe & Eberhardt, Markus, 2024. "Climate change and economic prosperity: Evidence from a flexible damage function," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    7. Matthew Agarwala & Matt Burke & Patrycja Klusak & Kamiar Mohaddes & Ulrich Volz & Dimitri Zenghelis, 2021. "Climate Change and Fiscal Responsibility: Risks and Opportunities," Working Papers 008, The Productivity Institute.
    8. Lamperti, Francesco & Bosetti, Valentina & Roventini, Andrea & Tavoni, Massimo & Treibich, Tania, 2021. "Three green financial policies to address climate risks," Journal of Financial Stability, Elsevier, vol. 54(C).
    9. Damette, Olivier & Mathonnat, Clément & Thavard, Julien, 2024. "Climate and sovereign risk: The Latin American experience with strong ENSO events," World Development, Elsevier, vol. 178(C).
    10. Rising, James A. & Taylor, Charlotte & Ives, Matthew C. & Ward, Robert E.t., 2022. "Challenges and innovations in the economic evaluation of the risks of climate change," LSE Research Online Documents on Economics 114941, London School of Economics and Political Science, LSE Library.
    11. Schultes, Anselm & Piontek, Franziska & Soergel, Bjoern & Rogelj, Joeri & Baumstark, Lavinia & Kriegler, Elmar & Edenhofer, Ottmar & Luderer, Gunnar, 2020. "Economic damages from on-going climate change imply deeper near-term emission cuts," MPRA Paper 103655, University Library of Munich, Germany.
    12. Simola, Heli, 2020. "Climate change and the Russian economy," BOFIT Policy Briefs 11/2020, Bank of Finland Institute for Emerging Economies (BOFIT).
    13. Patrycja Klusak & Matthew Agarwala & Matt Burke & Moritz Kraemer & Kamiar Mohaddes, 2023. "Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness," Management Science, INFORMS, vol. 69(12), pages 7468-7491, December.
    14. Gregory Casey & Stephie Fried & Ethan Goode, 2023. "Projecting the Impact of Rising Temperatures: The Role of Macroeconomic Dynamics," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(3), pages 688-718, September.
    15. Kahn, Matthew E. & Mohaddes, Kamiar & Ng, Ryan N.C. & Pesaran, M. Hashem & Raissi, Mehdi & Yang, Jui-Chung, 2021. "Long-term macroeconomic effects of climate change: A cross-country analysis," Energy Economics, Elsevier, vol. 104(C).
    16. Kornek, Ulrike & Klenert, David & Edenhofer, Ottmar & Fleurbaey, Marc, 2021. "The social cost of carbon and inequality: When local redistribution shapes global carbon prices," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    17. Francesco Jacopo Pintus & Jan P.A.M. Jacobs & Elmer Sterken & Jan Jacobs, 2024. "Fiscal Impacts of Climate Anomalies," CESifo Working Paper Series 11548, CESifo.
    18. Lamperti, F. & Dosi, G. & Napoletano, M. & Roventini, A. & Sapio, A., 2020. "Climate change and green transitions in an agent-based integrated assessment model," Technological Forecasting and Social Change, Elsevier, vol. 153(C).
    19. Holtermann, Linus & Rische, Marie-Christin, 2020. "The Subnational Effect of Temperature on Economic Production: A Disaggregated Analysis in European Regions," MPRA Paper 104606, University Library of Munich, Germany.
    20. Ciccarelli, Matteo & Marotta, Fulvia, 2024. "Demand or Supply? An empirical exploration of the effects of climate change on the macroeconomy," Energy Economics, Elsevier, vol. 129(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:climat:v:172:y:2022:i:3:d:10.1007_s10584-022-03373-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.