Here's Where Climate Change Could Cause Credit Downgrades - Investopedia
Here's Where Climate Change Could Cause Credit Downgrades
Key Takeaways
- The U.S. credit rating could fall five more notches by 2100 if climate change runs rampant, a research paper estimates.
- Costs to deal with climate-induced disasters could hurt the ability of the U.S. and other countries to pay their debts, leading to increased borrowing costs.
- Credit downgrades could be averted if countries meet the emissions goals set forth by the Paris Accords in 2015.
The U.S. and other countries could see their credit ratings tumble in the wake of climate change’s impacts, making their debts harder to pay off.
That’s according to research by Patrycja Klusak, a researcher at Cambridge, and a team of scientists who used AI to calculate the likely impact of climate change on the finances of 109 countries around the world. Klusak described her findings, first published in 2021 and updated this month, in an article for The Conversation last week. The U.S. would be among the hardest hit, as a map of potential credit downgrades shows.
“We wanted to put a price tag on what will happen after 2100,” Klusak said. “It will not matter whether you are in Scandinavia or whether you are in Canada, or the Maldives, it will affect you.”
By 2100, under a “business as usual” scenario where greenhouse gas emissions continue to rise at the rate they have in recent years, the U.S. credit rating could fall 4.6 notches. A five-notch downgrade by S&P would take it to A- from its current near-perfect rating of AA+, making it as credit-worthy as Poland and Malta are today, and costing the government as much as an extra $95 billion a year to service the national debt.
“Destruction of physical and natural capital, fiscal ramifications of extreme events, and adaptation and mitigation investments, reduced productivity, and political instability” would all take their toll and reduce credit ratings, Klusak wrote in the paper. Nations could start to see their credit ratings hurt as soon as 2030 and get worse over time, the research predicts.
Klusak’s model has already been adopted by several European banks in evaluating the financial risks posed by climate change, she said.
The good news, from a financial point of view, is that if countries meet their emissions goals set out by the Paris Agreement of 2015, the impact to national credit ratings would be minimal, according to the study.
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Related Knowledge Center: Climate economics
Climate change is now a driver of the world’s economy. The impact is profound:
- Catastrophic weather events — hurricanes, floods, droughts, high temperatures — are more frequent and more extreme. The cost can be measured in both the initial damage caused and the longer-term impact on the economy.
- Vulnerable communities are increasing climate-related investments, hardening infrastructure and taking other protective measures.
- Investment in carbon capture and storage technologies is increasingly rapidly.
- Governments are making investments and crafting regulations to reduce emissions of carbon dioxide and other greenhouse gases.
On top of all of this is the cost of uncertainty. As the Fourth National Climate Assessment, released in 2018 by the U.S. Global Change Research Program, says, “The assumption that current and future climate conditions will resemble the recent past is no longer valid.”