Published on 9 September 2021
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Climate and fiscal sustainability: risks and opportunities

Economists shed light on the comparatively under-researched question of how climate change might affect the financial system and in particular, fiscal sustainability and sovereign debt markets.

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.


Patrycja Klusak

Dr Patrycja Klusak

Affiliated Researcher

Dr Patrycja Klusak is an Associate Professor at Norwich Business School at University of East Anglia and an Affiliated Researcher at Bennett Institute for Public Policy at the University of...

Dimitri Zenghelis

Dimitri Zenghelis

Special Advisor: The Wealth Economy

Dimitri Zenghelis is a Senior Visiting Fellow at the Grantham Research Institute at the LSE where, from 2013-2017, he was Head of Climate Policy. In 2014 he was Acting Chief...

Matthew Agarwala

Dr Matthew Agarwala

Project Leader: The Wealth Economy

Matthew Agarwala, Economist, Bennett Institute for Public Policy, Cambridge. Matthew Agarwala is an economist interested in wealth-based approaches to measuring and delivering sustainability, wellbeing, and productivity. His research is motivated...

Dr Kamiar Mohaddes

Kamiar Mohaddes is an Associate Professor in Economics & Policy at the Judge Business School at the University of Cambridge and a Fellow in Economics at King’s College, Cambridge, where...

Matt Burke

Matt Burke is a Senior Lecturer at Sheffield Hallam University, former Research Associate at the Bennett Institute for Public Policy and Doctoral Candidate at the University of East Anglia. His...

Prof Ulrich Volz

Ulrich Volz is a Professor in Economics at SOAS University of London and Founding Director of the SOAS Centre for Sustainable Finance. He is also a Senior Research Fellow at...

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