The debt burden of tropical cyclones and climate change

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

Addressing climate change through mitigation and adaptation is anticipated to require more than $6 trillion in global investment annually by 2035. However, many countries face significant barriers to accessing this finance, due to low or absent credit ratings, large debt burdens, and high borrowing costs. Climate change may further amplify these barriers, creating a “vicious cycle” in which mounting economic losses reduce 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 both by their exposure to baseline naturally occurring tropical cyclones (TCs) and by anthropogenic warming. Our empirical estimates suggest that, on average across TC-exposed countries, 20% of debt-to-GDP ratios are attributable to TCs from 1980 to 2019. Across all countries, GDP levels are on average 12% lower due to the combined impacts of TCs and warming temperatures. In a separate machine-learning analysis, we estimate that these macroeconomic impacts are associated with an increased likelihood of hotter countries receiving credit ratings below investment grade (<BBB–), as well as persistent credit risk premiums of at least 1 basis point in 64 countries and 5 basis points in highly exposed countries. We provide estimates for 181 countries, including many TC-affected and/or hot countries that do not have bond yield data. Future increases in temperature and TC activity may further worsen sovereign credit conditions, potentially undermining both countries’ abilities to address climate change and their long-run development prospects.