Template-Type: ReDIF-Paper 1.0
Title: The Adaptation Imperative: Climate Change and Sovereign Credit Risk
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.
Author-Name: Burke, Matt
Author-Email: matt.burke@sheffield.ac.uk
Author-Workplace-Name: Sheffield University Management School, University of Sheffield
Author-Name: Mohaddes, Kamiar
Author-Workplace-Name: University of Cambridge
Author-Name: Raissi, Mehdi
Author-Workplace-Name: University of Cambridge
File-URL: https://oms-inet.files.svdcdn.com/production/files/The_Adaptation_Imperative_Climate_Change_And_Sovereign_Credit_Risk_WP_Feb_25.pdf?dm=1770296882
File-Format: Application/pdf
File-Function: 
Keywords: Climate, natural disasters, adaptation, credit ratings, debt, machine learning
Length: 19 pages
Classification-Jel: C45, G24, H63, Q54
Creation-Date: 2026-02
Handle: RePEc:amz:wpaper:2026-03