Evidence suggests that sovereign debt markets are taking climate effects into account in pricing, creating the potential for a climate-debt doom loop. However, climate risks to fiscal stability do not attract the same attention as climate risks to financial stability. This column discusses how integrated assessment models can be linked with stochastic debt sustainability analysis to inform our understanding of climate risks to sovereign debt. In a case study of Italy, introducing climate risks causes the debt dynamic to deteriorate and risk premia to increase non-linearly as a manifestation of the doom loop.
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