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Climate Change and Sovereign Risk

Nov 03, 2020 | SOAS

Climate change can have a material impact on sovereign risk through direct and indirect effects on public finances. It raises the cost of capital of climate-vulnerable countries and threatens debt sustainability. Governments must climate-proof their economies and public finances or potentially face an ever-worsening spiral of climate vulnerability and unsustainable debt burdens.

This study focuses on the complex nexus between climate change and sovereign risk, identifying and scrutinizing six transmission channels through which climate change can amplify sovereign risk and worsen a sovereign’s standing:
1. Fiscal impacts of climate-related natural disasters
2. Fiscal consequences of adaptation and mitigation policies
3. Macroeconomic impacts of climate change
4. Climate-related risks and financial sector stability
5. Impacts on international trade and capital flows
6. Impacts on political stability