Climate-Linked Downgrades Risk $270 Billion-a-Year Price Tag

(Bloomberg) -- Climate change could lift interest payments on sovereign and corporate debt by nearly $270 billion a year by the end of the century, according to Cambridge University and the University of East Anglia.

The authors of the study used artificial intelligence to simulate the impact of global warming on Standard & Poor’s credit ratings for 108 countries.

They found that -- in the absence of stringent climate policies -- downgrades could be widespread across major economies including the U.S., U.K., China, India, Australia and the European Union. More than 60 nations could already see lower ratings by 2030.

As a result, governments’ annual debt-servicing costs could rise between $137 billion and $205 billion by 2100 under a scenario that sees the planet warm by as much as 5 degrees Celsius (9 degrees Fahrenheit). Honoring the Paris Climate Agreement by following a pathway limiting temperature gains to below 2 degrees Celsius could still see an increase in expenditures of as much as $33 billion.

The additional cost to corporates ranges between $7.2 billion in the best case and $62.6 billion in the worst.

The estimates comes amid warnings by policy makers from around the world that financial markets are underpricing the risk of climate change on asset prices, with potentially costly future corrections.

“As climate change batters national economies, debts will become harder and more expensive to service,” said Matthew Agarwala, co-author from Cambridge’s Bennett Institute for Public Policy. “Markets need credible, digestible information on how climate change translates into material risk.”

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