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Faculty of Economics


Agarwala, M., Burke, M., Doherty-Bigara, J., Klusak, P., Mohaddes, K.

Climate Change and Sovereign Risk: A Regional Analysis for the Caribbean


Abstract: Climate change is an existential threat to the world economy, with complex, evolving and nonlinear dynamics that remain a source of great uncertainty. There is a bourgeoning literature on the economic impact of climate change, but research on how climate change affects sovereign risks is limited. This paper provides forward-looking regional analysis of the effects of climate change on sovereign creditworthiness, probability of default and the cost of borrowing for the Caribbean economies. Our results indicate that there is substantial variation in the sensitivity of ratings to climate change across the region which is due to the non-linear nature of ratings. Our findings improve the identification and management of sovereign climate risk and provides a forward-looking assessment of how climate change could affect the cost of accessing international finance. As such, it leads to a suite of policy options for countries in the region.

Keywords: Caribbean, Climate Economy Models, counterfactual analysis, Latin America, Physical Risks, Sovereign credit rating, Sovereign debt, Transition Risks

JEL Codes: C33 C53 G10 G18 H63 O44 O54 Q51 Q54

Author links: Kamiar Mohaddes