Perspective: Climate crisisCountries Most Exposed to Climate Change Face Higher Costs of Capital
By 2030 poor countries will need to spend $140bn-300bn each year on adaptive measures, such as coastal defenses, if they want to avoid the harm caused by climate change. That estimate, from the UN Environment Program, assumes that global temperatures will be only 2°C above pre-industrial levels by the end of the century, which seems unlikely. Adding to the costs, research suggests that these countries face higher interest rates than similar countries less exposed to climate risks. This raises the prospect of a vicious cycle, in which the most vulnerable countries pay more to borrow, making adaptation harder and them even more exposed.
In East Africa millions of people are suffering from a prolonged drought. Deadly typhoons are wreaking havoc in Vietnam. Honduran coffee-farmers are seeing their crops wither in the heat. Poor countries have less capacity than rich ones to adapt to changing weather patterns, and tend to be closer to the equator, where weather patterns are becoming most volatile. As the world heats up, they will suffer most.
The Economist writes that by 2030 poor countries will need to spend $140bn-300bn each year on adaptive measures, such as coastal defenses, if they want to avoid the harm caused by climate change. That estimate, from the UN Environment Program, assumes that global temperatures will be only 2°C above pre-industrial levels by the end of the century, which seems unlikely. Adding to the costs, research suggests that these countries face higher interest rates than similar countries less exposed to climate risks. This raises the prospect of a vicious cycle, in which the most vulnerable countries pay more to borrow, making adaptation harder and them even more exposed.
The research focuses on the V20, a group founded by 20 vulnerable countries whose membership has since grown to 48. The members are mostly poor, together accounting for less than 5% of global GDP. They include low-lying atolls, such as the Marshall Islands, and economies dominated by agriculture, such as Kenya. The researchers, led by Ulrich Volz of SOAS University of London and Bob Buhr of Imperial College Business School, examined sovereign-bond yields between 1996 and 2016 for 46 countries, 25 of them in the V20. “After controlling for non-climate factors, such as income per person and levels of public debt, they estimate that V20 countries must pay interest rates 1.2 percentage points higher than comparable countries. That raises the V20’s borrowing costs by about 10 percent, equivalent to an extra $4bn each year in interest payments,” the Economist notes.
