The public costs of climate-induced financial instability

Abstract

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.

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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.

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Acknowledgements

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.

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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.

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Correspondence to Francesco Lamperti.

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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.

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

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Lamperti, F., Bosetti, V., Roventini, A. et al. The public costs of climate-induced financial instability. Nat. Clim. Chang. 9, 829–833 (2019). https://doi.org/10.1038/s41558-019-0607-5

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