The Adaptation Imperative: Climate Change and Sovereign Credit Risk

Matt Burke, Kamiar Mohaddes and Mehdi Raissi

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

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: 20 pages
Date: 2026-02
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https://crawford.anu.edu.au/sites/default/files/20 ... 0Mohaddes_Raissi.pdf (application/pdf)

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:een:camaaa:2026-11

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