Climate Policy and Sovereign Debt: The Impact of Transition Scenarios on Sovereign Creditworthiness

Matt Burke, Matthew Agarwala, Patrycja Klusak and Kamiar Mohaddes

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper links climate science with sovereign risk assessment to produce a single forward-looking measure of country-level climate change risk. We combine the Network for Greening the Financial System (NGFS) climate scenarios with a sovereign credit ratings model to simulate the impact of climate change on credit ratings, cost of debt and probability of default. For the first time, we extend beyond the physical risks of extreme weather events to explicitly incorporate risks associated with transitioning the global economy towards Net Zero. Across the sample of 48 countries and under a scenario of high (low) physical and transition risks, we find average downgrades of 3.9 (2.7) notches and mean increases in the cost of debt of 123 (76) basis points and default probability of 10.4% (6.2%). Counter-intuitively, ratings, default probability, and cost of debt appear insensitive to scenarios in some countries, with important implications for the usefulness of NGFS scenarios across central banks.

Keywords: sovereign debt; credit ratings; climate policy; transition risks; climate change (search for similar items in EconPapers)
JEL-codes: C53 E6 G20 H63 Q51 Q54 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2024-12
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https://crawford-prod.anu.edu.au/sites/default/fil ... _Klusak_Mohaddes.pdf

Related works:
Working Paper: Climate Policy and Sovereign Debt: The Impact of Transition Scenarios on Sovereign Creditworthiness (2024)
Working Paper: Climate Policy and Sovereign Debt: The Impact of Transition Scenarios on Sovereign Creditworthiness (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2024-73

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