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.


  • About the author

    Dr Matthew Agarwala, Project Leader: The Wealth Economy

    Matthew Agarwala, Economist, Bennett Institute for Public Policy, Cambridge.   Learn more

    Matthew Agarwala
  • About the author

    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 Cambridge.   Learn more

    Patrycja Klusak
  • About the author

    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 Economist for the Global Commission on the Economy and Climate (a.k.a The New Climate Economy). ...   Learn more

    Dimitri Zenghelis
  • About the author

    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 he co-directs the King’s Entrepreneurship Lab.

  • About the author

    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 main areas of interest are in the application of computational techniques to contemporary problems in finance and economics.

  • About the author

    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 the German Development Institute and Honorary Professor of Economics at the University of Leipzig.