The public costs of climate-induced financial instability


Recent evidence suggests that climate change will significantly affect economic growth and several productive elements of modern economies, such as workers and land1,2,3,4. Although historical records indicate that economic shocks might lead to financial instability, few studies have focused on the impact of climate change on the financial actors5,6. This paper examines how climate-related damages impact the stability of the global banking system. We use an agent-based climate–macroeconomic model calibrated on stylized facts, future scenarios and climate impact functions7 affecting labour and capital. Our results indicate that climate change will increase the frequency of banking crises (26–248%). Rescuing insolvent banks will cause an additional fiscal burden of approximately 5–15% of gross domestic product per year and increase the ratio of public debt to gross domestic product by a factor of 2. We estimate that around 20% of such effects are caused by the deterioration of banks’ balance sheets induced by climate change. Macroprudential regulation attenuates bailout costs, but only moderately. Our results show that leaving the financial system out of climate–economy integrated assessment may lead to an underestimation of climate impacts and that financial regulation can play a role in mitigating them.

Access options

Rent or Buy article

Get time limited or full article access on ReadCube.


All prices are NET prices.

Fig. 1: Climate-induced effects on the banking sector and public finances across scenarios.
Fig. 2: Global GDP growth and climate-induced instability.
Fig. 3: Public costs of climate-induced bank bailouts.

Data availability

The simulation data that support the findings of this study are available from the corresponding author on request.

Code availability

The code that supports the findings of this study is available from the corresponding author on request.


  1. 1.

    Auffhammer, M. Quantifying economic damages from climate change. J. Econ. Perspect. 32, 33–52 (2018).

    Article  Google Scholar 

  2. 2.

    Burke, M., Hsiang, S. M. & Miguel, E. Global non-linear effect of temperature on economic production. Nature 527, 235–239 (2015).

    CAS  Article  Google Scholar 

  3. 3.

    Carleton, T. A. & Hsiang, S. M. Social and economic impacts of climate. Science 353, aad9837 (2016).

    Article  CAS  Google Scholar 

  4. 4.

    Dell, M., Jones, B. F. & Olken, B. A. Temperature and income: reconciling new cross-sectional and panel estimates. Am. Econ. Rev. 99, 198–204 (2009).

  5. 5.

    Dafermos, Y., Nikolaidi, M. & Galanis, G. Climate change, financial stability and monetary policy. Ecol. Econ. 152, 219–234 (2018).

    Article  Google Scholar 

  6. 6.

    Dietz, S., Bowen, A., Dixon, C. & Gradwell, P. ‘Climate value at risk’ of global financial assets. Nat. Clim. Change 6, 676–679 (2016).

    Article  Google Scholar 

  7. 7.

    Nordhaus, W. D. Revisiting the social cost of carbon. Proc. Natl Acad. Sci. USA 114, 1518–1523 (2017).

    CAS  Article  Google Scholar 

  8. 8.

    Laeven, L. & Valencia, F. Systemic Banking Crises Database: An Update (IMF, 2012);

  9. 9.

    Jordà, Ò., Schularick, M. & Taylor, A. M. When credit bites back. J. Money Credit Bank. 45, 3–28 (2013).

    Article  Google Scholar 

  10. 10.

    Reinhart, C. M. & Rogoff, K. S. The aftermath of financial crises. Am. Econ. Rev. 99, 466–472 (2009).

    Article  Google Scholar 

  11. 11.

    Reinhart, C. M. & Rogoff, K. S. This Time Is Different: Eight Centuries of Financial Folly (Princeton Univ. Press, 2009).

  12. 12.

    Diffenbaugh, N. S. & Burke, M. Global warming has increased global economic inequality. Proc. Natl Acad. Sci. USA 116, 9808–9813 (2019).

    CAS  Article  Google Scholar 

  13. 13.

    Hsiang, S. et al. Estimating economic damage from climate change in the United States. Science 356, 1362–1369 (2017).

    CAS  Article  Google Scholar 

  14. 14.

    Hsiang, S. M. Temperatures and cyclones strongly associated with economic production in the Caribbean and Central America. Proc. Natl Acad. Sci. USA 107, 15367–15372 (2010).

    CAS  Article  Google Scholar 

  15. 15.

    Martinich, J. & Crimmins, A. Climate damages and adaptation potential across diverse sectors of the United States. Nat. Clim. Change 9, 397–404 (2019).

    Article  Google Scholar 

  16. 16.

    Schlenker, W. & Roberts, M. J. Nonlinear temperature effects indicate severe damages to US crop yields under climate change. Proc. Natl Acad. Sci. USA 106, 15594–15598 (2009).

    CAS  Article  Google Scholar 

  17. 17.

    Carney, M. Breaking the Tragedy of the Horizon: Climate Change and Financial Stability (Lloyd’s of London, 2015).

  18. 18.

    Bansal, R., Kiku, D. & Ochoa, M. Price of Long-Run Temperature Shifts in Capital Markets Working Paper No. 22529 (NBER, 2016).

  19. 19.

    Battiston, S., Mandel, A., Monasterolo, I., Schütze, F. & Visentin, G. A climate stress-test of the financial system. Nat. Clim. Change 7, 283–288 (2017).

    Article  Google Scholar 

  20. 20.

    Mercure, J.-F. et al. Macroeconomic impact of stranded fossil fuel assets. Nat. Clim. Change 8, 588–593 (2018).

    Article  Google Scholar 

  21. 21.

    Safarzyńska, K. & van den Bergh, J. C. Financial stability at risk due to investing rapidly in renewable energy. Energy Policy 108, 12–20 (2017).

    Article  Google Scholar 

  22. 22.

    Trinks, A., Scholtens, B., Mulder, M. & Dam, L. Fossil fuel divestment and portfolio performance. Ecol. Econ. 146, 740–748 (2018).

    Article  Google Scholar 

  23. 23.

    Campiglio, E. et al. Climate change challenges for central banks and financial regulators. Nat. Clim. Change 8, 462–468 (2018).

    Article  Google Scholar 

  24. 24.

    High-Level Expert Group on Sustainable Finance Financing a Sustainable European Economy Interim Report (European Commission, 2017).

  25. 25.

    Lamperti, F., Dosi, G., Napoletano, M., Roventini, A. & Sapio, A. Faraway, so close: coupled climate and economic dynamics in an agent-based integrated assessment model. Ecol. Econ 150, 315–339 (2018).

    Article  Google Scholar 

  26. 26.

    Lamperti, F., Dosi, G., Napoletano, M., Roventini, A. & Sapio, A. And Then He Wasn’t a She: Climate Change and Green Transitions in an Agent-Based Integrated Assessment Model LEM Papers Series 2018/14 (Scuola Superiore Sant’Anna, Institute of Economics, 2018).

  27. 27.

    Riahi, K. et al. The shared socioeconomic pathways and their energy, land use, and greenhouse gas emissions implications: an overview. Glob. Environ. Change 42, 153–168 (2017).

    Article  Google Scholar 

  28. 28.

    Adhvaryu, A., Kala, N. & Nyshadham, A. The Light and the Heat: Productivity Co-benefits of Energy-Saving Technology (NBER, 2018).

  29. 29.

    Kjellstrom, T., Kovats, R. S., Lloyd, S. J., Holt, T. & Tol, R. S. The direct impact of climate change on regional labor productivity. Arch. Environ. Occup. Health 64, 217–227 (2009).

    Article  Google Scholar 

  30. 30.

    Seppanen, O., Fisk, W. J. & Faulkner, D. Cost Benefit Analysis of the Night-Time Ventilative Cooling in Office Building (LBNL, 2003).

  31. 31.

    Seppanen, O., Fisk, W. J. & Lei, Q. Effect of Temperature on Task Performance in Office Environment (LBNL, 2006).

  32. 32.

    Somanathan, E., Somanathan, R., Sudarsan, A. & Tewari, M. The Impact of Temperature on Productivity and Labor Supply: Evidence from Indian Manufacturing Working Paper 2018/69 (Becker Friedman Institute, 2018).

  33. 33.

    Batten, S. et al. Climate Change and the Macro-economy: A Critical Review (Bank of England, 2018).

  34. 34.

    Ricke, K., Drouet, L., Caldeira, K. & Tavoni, M. Country-level social cost of carbon. Nat. Clim. Change 8, 895–900 (2018).

    CAS  Article  Google Scholar 

  35. 35.

    Balint, T. et al. Complexity and the economics of climate change: a survey and a look forward. Ecol. Econ 138, 252–265 (2017).

    Article  Google Scholar 

  36. 36.

    Fagiolo, G. & Roventini, A. Macroeconomic policy in DSGE and agent-based models redux: new developments and challenges ahead. J. Artif. Soc. Soc. Simul. 20, 1 (2017).

    Article  Google Scholar 

  37. 37.

    OECD OECD Employment Outlook 2018 (OECD, 2018).

  38. 38.

    Bernanke, B. S., Lown, C. S. & Friedman, B. M. The Credit Crunch BPEA 1991 No. 2 (Brookings Institution, 1991).

  39. 39.

    Brunnermeier, M. K. Deciphering the liquidity and credit crunch 2007–2008. J. Econ. Perspect. 23, 77–100 (2009).

    Article  Google Scholar 

  40. 40.

    Dosi, G., Fagiolo, G., Napoletano, M. & Roventini, A. Income distribution, credit and fiscal policies in an agent-based Keynesian model. J. Econ. Dyn. Control 37, 1598–1625 (2013).

    Article  Google Scholar 

  41. 41.

    Campiglio, E. Beyond carbon pricing: the role of banking and monetary policy in financing the transition to a low-carbon economy. Ecol. Econ. 121, 220–230 (2016).

    Article  Google Scholar 

  42. 42.

    Basel Committee on Banking Supervision Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (BIS, 2011).

  43. 43.

    Chinazzi, M. & Fagiolo, G. In Banking Integration and Financial Crisis: Some Recent Developments (eds Fernández, I. A. & Tortosa, E.) Ch. 4 (Fundacion BBVA 2015).

  44. 44.

    Kiyotaki, N. & Moore, J. Balance-sheet contagion. Am. Econ. Rev 92, 46–50 (2002).

    Article  Google Scholar 

  45. 45.

    Roukny, T., Bersini, H., Pirotte, H., Caldarelli, G. & Battiston, S. Default cascades in complex networks: topology and systemic risk. Sci. Rep. 3, 2759 (2013).

    Article  Google Scholar 

  46. 46.

    Weyant, J. Some contributions of integrated assessment models of global climate change. Rev. Environ. Econ. Policy 11, 115–137 (2017).

    Article  Google Scholar 

  47. 47.

    Matthews, H. D., Solomon, S. & Pierrehumbert, R. Cumulative carbon as a policy framework for achieving climate stabilization. Phil. Trans. R. Soc. A 370, 4365–4379 (2012).

    CAS  Article  Google Scholar 

  48. 48.

    Dosi, G., Fagiolo, G., Napoletano, M., Roventini, A. & Treibich, T. Fiscal and monetary policies in complex evolving economies. J. Econ. Dyn. Control 52, 166–189 (2015).

    Article  Google Scholar 

  49. 49.

    Bikker, J. & Metzemakers, P. Bank provisioning behaviour and procyclicality. J. Int. Financ. Market. Inst. Money 15, 141–157 (2005).

    Article  Google Scholar 

  50. 50.

    Basel Committee on Banking Supervision Capital Requirements and Bank Behaviour: The Impact of the Basel Accord Working Paper No. 1 (BIS, 1999).

  51. 51.

    Bernanke, B. S. Non-monetary effects of the financial crisis in the propagation of the Great Depression. Am. Econ. Rev 73, 257–276 (1983).

    Google Scholar 

  52. 52.

    Jimnez, G., Ongena, S., Peydr, J.-L. & Saurina, J. Macroprudential policy, countercyclical bank capital buffers, and credit supply: evidence from the Spanish dynamic provisioning experiments. J. Polit. Econ. 125, 2126–2177 (2017).

    Article  Google Scholar 

  53. 53.

    Lown, C. & Morgan, D. P. The credit cycle and the business cycle: new findings using the loan officer opinion survey. J. Money Credit Bank. 38, 1575–1597 (2006).

    Article  Google Scholar 

  54. 54.

    Mercure, J.-F., Pollitt, H., Bassi, A. M., Viñuales, J. E. & Edwards, N. R. Modelling complex systems of heterogeneous agents to better design sustainability transitions policy. Glob. Environ. Change 37, 102–115 (2016).

    Article  Google Scholar 

  55. 55.

    Stern, N. Current climate models are grossly misleading. Nature 530, 407–409 (2016).

    Article  CAS  Google Scholar 

  56. 56.

    Bonabeau, E. Agent-based modeling: methods and techniques for simulating human systems. Proc. Natl Acad. Sci. USA 99, 7280–7287 (2002).

    CAS  Article  Google Scholar 

  57. 57.

    Farmer, J. D. & Foley, D. The economy needs agent-based modelling. Nature 460, 685–686 (2009).

    CAS  Article  Google Scholar 

  58. 58.

    van Vuuren, D. P. et al. A new scenario framework for climate change research: scenario matrix architecture. Climatic Change 122, 373–386 (2014).

    Article  Google Scholar 

  59. 59.

    O’Neill, B. C. et al. A new scenario framework for climate change research: the concept of shared socioeconomic pathways. Climatic Change 122, 387–400 (2014).

    Article  Google Scholar 

  60. 60.

    Riahi, K. et al. RCP 8.5—a scenario of comparatively high greenhouse gas emissions. Climatic Change 109, 33–57 (2011).

    CAS  Article  Google Scholar 

  61. 61.

    Allen, M. R. et al. Warming caused by cumulative carbon emissions towards the trillionth tonne. Nature 458, 1163–1166 (2009).

    CAS  Article  Google Scholar 

  62. 62.

    Matthews, H. D., Gillett, N. P., Stott, P. A. & Zickfeld, K. The proportionality of global warming to cumulative carbon emissions. Nature 459, 829–832 (2009).

    CAS  Article  Google Scholar 

  63. 63.

    Oulton, N. Productivity and the great recession. Intereconomics 53, 63–68 (2018).

    Article  Google Scholar 

  64. 64.

    Nordhaus, W. Estimates of the social cost of carbon: concepts and results from the DICE-2013R model and alternative approaches. J. Assoc. Environ. Resour. Econ. 10, 273–312 (2014).

    Google Scholar 

  65. 65.

    Nordhaus, W. D. An optimal transition path for controlling greenhouse gases. Science 258, 1315–1319 (1992).

    CAS  Article  Google Scholar 

Download references


We acknowledge support from Fondazione Eni Enrico Mattei, FEEM. The research leading to these results received funding from the European Research Council under the European Community programme ‘Ideas’, call identifier ERC-2013-StG/ERC, grant agreement no. 336703, project RISICO and from the European Research Council under the European Union’s Seventh Framework Programme (FP7/2007–2013)/ERC grant agreement no. 336155, project COBHAM. This paper is also part of a project that has received funding from the EU H2020 research and innovation programme under the Marie Skłodowska-Curie grant agreement no. 681228, GEMCLIME, and from the EU H2020 research and innovation action under grant agreement no. 822781, GROWINPRO. We thank T. Treibich and M. Guerini for helpful discussions, comments and support. We also thank participants at ECOMOD 2018 (Venice), EAEPE 2018 (Nice), the 2018 Workshop on Economic and Financial Implications of Climatic Change (Milan), WEHIA 2019 and the seminars at IAASA and Universitè Paris Panthèon-Sorbonne.

Author information




All authors contributed equally to the project planning, design of the simulation experiments, analysis of the results and writing of the paper. F.L. also developed the code and ran the simulations.

Corresponding author

Correspondence to Francesco Lamperti.

Ethics declarations

Competing interests

The authors declare no competing interests.

Additional information

Peer review information Nature Climate Change thanks Yannis Dafermos and the other, anonymous, reviewer(s) for their contribution to the peer review of this work.

Publisher’s note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Supplementary information

Supplementary methods

Supplementary results, Figs. 1–11, Tables 1–9 and references.

Reporting Summary

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Lamperti, F., Bosetti, V., Roventini, A. et al. The public costs of climate-induced financial instability. Nat. Clim. Chang. 9, 829–833 (2019).

Download citation

Further reading


Nature Briefing

Sign up for the Nature Briefing newsletter — what matters in science, free to your inbox daily.

Get the most important science stories of the day, free in your inbox. Sign up for Nature Briefing