The Adaptation Imperative: Climate Change and Sovereign Credit Risk

Matt Burke (), Kamiar Mohaddes and Mehdi Raissi
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Matt Burke: Sheffield University Management School, University of Sheffield
Mehdi Raissi: University of Cambridge

INET Oxford Working Papers from Institute for New Economic Thinking at the Oxford Martin School, University of Oxford

Abstract: This paper examines how climate change affects sovereign credit ratings and borrowing costs under the latest IPCC climate scenarios. We integrate country-specific income-loss estimates from Mohaddes and Raissi (2025) into the IMF's Q-CRAFT macro-fiscal framework and apply a Random Forest emulator to predict rating trajectories. We also use the CDS-spread mapping from Aizenman et al. (2013) to translate these rating changes into borrowing-cost effects. Results show negligible rating impacts under the Paris aligned scenario but significant downgrades (up to 2.8 notches) and increases in borrowing costs (30 basis points) under high-emission, slow-adaptation pathways by 2100 for the G20 countries. Monte Carlo simulations highlight substantial tail risks and cross-country heterogeneity, with tail outcomes producing downgrades of up to six notches by century end. We further extend the analysis to unrated economies and incorporate acute physical risks from climate-related natural disasters, using DIGNAD to estimate their cumulative GDP effects over 30 years and feeding these into the Q-CRAFT and the Random Forest emulator to project ratings. Disaster exposure can induce 1–3 notch downgrades by 2050 for highly vulnerable emerging economies.

Keywords: Climate; natural disasters; adaptation; credit ratings; debt; machine learning (search for similar items in EconPapers)
JEL-codes: C45 G24 H63 Q54 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2026-02
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Related works:
Working Paper: The Adaptation Imperative: Climate Change and Sovereign Credit Risk (2026)
Working Paper: The Adaptation Imperative: Climate Change and Sovereign Credit Risk (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:amz:wpaper:2026-03

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