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Impact of climate vulnerability on fiscal risk: Do religious tensions and financial development matter?

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  • Saadaoui, Jamel
  • Beirne, John
  • Park, Donghyun
  • Uddin, Gazi Salah

Abstract

Using data from around 100 countries between 1995 and 2019, we examine the impact of climate vulnerability on fiscal risk. We also explore the transmission channels that are important for the relationship between climate vulnerability and fiscal risk. Our results show that in highly climate-vulnerable economies, increased vulnerability leads to higher government bond yields by 0.5 to 1.5 percentage point and lower sovereign debt ratings by up to one notch over two years. These effects are exacerbated by religious tensions as a form of political instability but mitigated by well-developed financial markets. Therefore, even though fiscal consolidation is crucial for containing fiscal risks in the case of climate vulnerability, political stability and financial development also matter.

Suggested Citation

  • Saadaoui, Jamel & Beirne, John & Park, Donghyun & Uddin, Gazi Salah, 2026. "Impact of climate vulnerability on fiscal risk: Do religious tensions and financial development matter?," Energy Economics, Elsevier, vol. 155(C).
    • Handle: RePEc:eee:eneeco:v:155:y:2026:i:c:s0140988326000599
    DOI: 10.1016/j.eneco.2026.109180
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    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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