The economic fallout of climate change could impact nations worldwide. Rising carbon emissions may lead to soaring debt servicing costs for 59 countries within the next decade as the world grapples with the consequences of unchecked climate change, states a recent research report.
Researchers warn of potential credit score downgrades for major players like China, India, the United States, and Canada. The implications are dire, with higher borrowing costs for nations translating into increased corporate debt.
The economic damage caused by climate change is already evident, with recent heat waves shaving off 0.6 percent of global output. While insurance giant Allianz sounds the alarm, rating agencies have been cautious in quantifying the risks posed by climate change in their assessments.
However, a collaborative study by the University of East Anglia and the University of Cambridge, through the use of AI models and climate economic projections, has created a ‘climate-adjusted’ rating system.
While rating agencies recognize that economies are vulnerable to climate change, they have been cautious in assessing such risks in their ratings exercises due to uncertainty about the potential magnitude of the harm.
 The UEA/Cambridge project uses current S&P Global ratings to train artificial intelligence models, which are then coupled with climate economic models and S&P’s own natural catastrophe risk assessments to develop new ratings for alternative climate scenarios.
If the world manages to meet the Paris Climate Agreement’s aim of keeping temperatures below two degrees Celsius, sovereign credit ratings would experience little impact in the short term and very minor long-term repercussions, according to the simulation.
However, a worst-case scenario of high emissions, on the other hand, would result in greater global debt servicing expenses, amounting to hundreds of billions of dollars in current money, according to the model.
Developing nations with lower credit scores may bear the brunt of the physical impacts of climate change. Yet, even nations with the highest credit rankings are at risk of severe downgrades due to the potential steep fall they would experience.
