Climate change will severely increase the national debt of countries worldwide, warns a new study.
The research predicts that 59 nations will experience a drop in sovereign credit ratings – the credit of a state backed by its financial resources – in the coming decade.
Added interest payments alone caused by these climate-induced downgrades could cost nations more than $200 billion (£160bn).
And, worryingly, researchers deem their foreboding projections to be ‘extremely conservative’, not taking into account the economic impacts and credit-rating downgrades of extreme weather events, which we have already begun to witness.
The study, which is the first to equate climate science with real-world financial indicators, used artificial intelligence to simulate the economic impacts of climate change on a leading credit rating agency’s ratings for more than 100 countries up to the end of the century.
The results suggest many economies will be downgraded unless emissions are reduced, and that detrimental financial impacts could be visible by the decade’s end.
Sovereign ratings assess the creditworthiness of a country and are a key gauge for investors.
These ratings, which cover more than $66 trillion in sovereign debt, as well as the agencies behind them serve as the gatekeepers to global capital.
The first sovereign credit rating adjusted to take climate change into account demonstrates that many national economies can expect downgrades in their ratings unless action is taken to combat global warming and reduce emissions.
Economists utilized artificial intelligence to simulate the economic effects of climate change on the leading American credit rating agency Standard and Poor Global Ratings (S&P) for 108 countries in the coming decades.
The study further suggests that sticking to the Paris Climate Agreement, adopted in 2015 to hold global temperatures to a rise of less than two degrees Celsius, would see no short-term impact on sovereign credit ratings and keep long-term effects to a minimum.
When their AI simulations incorporate climate volatility over time, taking into account the extreme weather events we are beginning to witness already, the downgrades and related costs increase substantially.
Their AI models were trained to predict creditworthiness on S&P’s ratings from 2015-2020, which were then combined with climate economic models and S&P’s natural disaster risk assessments to get ‘climate-smart’ credit ratings for a range of global warming scenarios.
Whilst developing nations with lower credit scores are predicted to be hit harder by the physical effects of climate change, top-ranking nations in terms of sovereign credit ratings were likely to face more severe downgrades – fitting with the nature of sovereign ratings: that those at the top have further to fall.
Produced in association with SWNS Talker