The debt burden of tropical cyclones and climate change

June Choi, Renzhi Jing, Christopher Callahan, Marshall Burke, Noah S Diffenbaugh

Addressing climate change, through both mitigation and adaptation, is anticipated to require global investments of more than $6 trillion annually by 2035. However, many countries face significant barriers to accessing the finance needed for these investments, due to low or absent credit ratings, large debt burdens, and high borrowing costs. There is concern that climate change, through its economic impacts, may amplify these barriers, potentially locking countries into a “vicious cycle” in which mounting economic losses further constrain countries' capacity to invest in adaptation and mitigation. We provide evidence that the cost and availability of capital for many countries have already been shaped by their historical exposure to tropical cyclones (TCs) and warming temperatures. Our empirically derived estimates suggest that, across all TC-exposed countries, debt-to-GDP ratios are on average 30% higher due to the cumulative effects of TCs since 1990. GDP levels are on average 10% lower due to the combined impacts of TCs and warming temperatures across all countries. We estimate that because of these impacts, hotter countries are more likely to receive credit ratings below investment grade (< BBB–), and borrowing costs are at least 1 basis point (0.01%) higher in 28 countries and 5 basis points higher in highly-exposed countries. Future increases in temperature and TC activity will likely worsen countries' credit, potentially undermining both countries' abilities to address climate change and their long-run development prospects.