Climate Change and Fiscal Sustainability: Risks and Opportunities

22 Pages Posted: 16 Sep 2021 Last revised: 23 Sep 2021

See all articles by Matthew Agarwala

Matthew Agarwala

University of Cambridge - Bennett Institute for Public Policy

Matt Burke

Sheffield Hallam University - Sheffield Business School; University of East Anglia, UK; Bennett Institute for Public Policy, University of Cambridge, UK

Patrycja Klusak

Norwich Business School; Bennett Institute for Public Policy, University of Cambridge

Kamiar Mohaddes

University of Cambridge - Judge Business School; University of Cambridge - King's College, Cambridge; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Ulrich Volz

University of London - School of Oriental and African Studies (SOAS) - Economics; Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE)

Dimitri Zenghelis

Bennett Institute for Public Policy, University of Cambridge, UK and Grantham Research Institute, London School of Economics, UK

Date Written: September 15, 2021

Abstract

Both the physical and transition-related impacts of climate change pose substantial macroeconomic risks. Yet, markets still lack credible estimates of how climate change will affect debt sustainability, sovereign creditworthiness, and the public finances of major economies. We present a taxonomy for tracing the physical and transition impacts of climate change through to impacts on sovereign risk. We then apply the taxonomy to the UK’s potential transition to net zero. Meeting internationally agreed climate targets will require an unprecedented structural transformation of the global economy over the next two or three decades. The changing landscape of risks warrants new risk management and hedging strategies to contain climate risk and minimise the impact of asset stranding and asset devaluation. Yet, conditional on action being taken early, the opportunities from managing a net zero transition would substantially outweigh the costs.

Keywords: Sovereign debt, climate change, net zero, transition risk, productivity

Suggested Citation

Agarwala, Matthew and Burke, Matt and Klusak, Patrycja and Klusak, Patrycja and Mohaddes, Kamiar and Volz, Ulrich and Zenghelis, Dimitri, Climate Change and Fiscal Sustainability: Risks and Opportunities (September 15, 2021). CAMA Working Paper No. 80/2021, Available at SSRN: https://ssrn.com/abstract=3924044 or http://dx.doi.org/10.2139/ssrn.3924044

Matthew Agarwala

University of Cambridge - Bennett Institute for Public Policy ( email )

First Floor, 17 Mill Lane
Cambridge, CB2 1RX
Great Britain

Matt Burke

Sheffield Hallam University - Sheffield Business School ( email )

City Campus
Howard Street
Sheffield, S1 1WB
United Kingdom

University of East Anglia, UK; Bennett Institute for Public Policy, University of Cambridge, UK ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

Patrycja Klusak

Norwich Business School ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

HOME PAGE: http://https://www.uea.ac.uk/norwich-business-school/people/profile/p-klusak

Bennett Institute for Public Policy, University of Cambridge ( email )

First Floor
17 Mill Lane
Cambridge, CB2 1RX
Great Britain

Kamiar Mohaddes (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

University of Cambridge - King's College, Cambridge ( email )

King's Parade
Cambridge, CB2 1ST
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

Ulrich Volz

University of London - School of Oriental and African Studies (SOAS) - Economics

London, WC1E 7HU
United Kingdom

Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE) ( email )

Tulpenfeld 4
Bonn, 53113
Germany

Dimitri Zenghelis

Bennett Institute for Public Policy, University of Cambridge, UK and Grantham Research Institute, London School of Economics, UK ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

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