03 Jul 2018   

Climate change could cost poor countries an extra $168 billion in interest

A new study from the Imperial College Business School has revealed that poor countries could have to pay $168 billion more in interest over the next ten years as natural disasters and extreme weather events increase.

The study, which was commissioned by UN Environment with financial support from MAVA Foundation, found that over the last 10 years developing countries have suffered $40 billion in additional interest payments on government debt.

Nations that rely heavily on agriculture are likely to suffer the most as global temperatures rise and disasters such as storms, floods and droughts become more frequent. For example, the rise fields in Vietnam are highly vulnerable to sea level rise and Guatemala’s maize output is likely to be hindered by storms and drought.

The research is the first to investigate the link between global warming and credit profiles and focused on members of the Climate Vulnerable Forum, a group of 48 countries most at risk from climate change. Members include: Bangladesh, Colombia, Costa Rica and Ethiopia.

The researchers have warned that interest costs are likely to rise between $146 billion and $168 billion over the next decade and would significantly worsen the economic challenges faced by developing countries.

Similarly, for every $10 dollars these countries paid in interest over the last 10 years, $1 of that was attributed to climate vulnerability. This translates into extra costs of $62 billion.

However, the researchers also found that investing in climate resilience can improve fiscal health at national levels.

Dr Charles Donovan, Director of the Centre for Climate Finance and Investment at Imperial College Business School, commented:

“Our work demonstrates that climate change is not only imposing economic and social costs on developing countries, but it is also amplifying existing risks that are already priced in fixed income markets. These impacts will grow”

Simon Zadek, special advisor to UN Environment added:

"Integrating climate risk into financial decisions is necessary, but the unacceptable logic of the markets is transferring the costs to the world's poorest"

Investing in projects such as flood protection infrastructure and afforestation could have a key role in offsetting the problem.

The research identifies several market and policy initiatives that can reduce the burden of climate threats on markets. To be effective from a financial perspective, the research suggests that climate adaptation initiatives must accomplish at least one of the following: reduce the total economic costs of the impact of climate change; improve the speed of economic recovery; and cost-effectively transfer climate-related financial risks.

 

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Image credit: Madeleine Giles