From the Abstract: To what extent could the necessity to address climate change threaten sovereign debt sustainability and reduce fiscal space? Mitigation efforts and increasing temperatures imply economic costs that reduce countries’ growth rates, respectively in the short and long term. This can make the repayment of sovereign debt more difficult. In this paper, I assess the impact of the costly reduction of greenhouse gas (GHG) emissions on debt limits (the maximum government debt-GDP ratios that can be sustained without risk of default). Different scenarios, both consistent and inconsistent with the carbon budget constraints of the Paris Agreement, are analyzed for advanced economies to quantify how their debt limits are affected by abatement costs and climate damages. For some countries, such as Italy, mitigation efforts are able to push government debt into the unsustainable territory. Moreover, the role of coordination in transition policies among countries is assessed as a key determinant of sovereign debt sustainability. The evidence shows that failing to enforce a slowdown in emissions at a global level, and to stabilize climate damages, causes debt limits to plunge in the long term for all countries, even for the few that are implementing the transition. On the contrary, if the green transition is coordinated globally, debt limits converge to stable and higher levels, despite an initial and temporary decrease due to the negative impact of emission reductions on GDP growth rates. The evidence presented indicates that it is significantly more beneficial for countries to collaboratively and promptly transition towards mitigating climate impacts on growth and fiscal space. This will support sustainable public debt and the potential to finance the greening of our economies.
