Climate-financial trap: an empirical approach to detecting situations of double vulnerability

Résumé 0

The present study proposes to build a systematic approach to detecting and specifying situations of double vulnerability. Double vulnerability refers to a situation where a country combines climate and macro-financial vulnerabilities. It is defined as a situation where climate change (either in the form of occasional shocks or chronic deterioration in climate conditions) is likely to have multidimensional impacts on populations, ecosystems and economic activity, leading to an increase in fiscal imbalances and public debt ratios in the short to medium term. In turn, this negative dynamic limits governments’ ability to deal effectively with the consequences of climate change in the future, and in particular to support the most vulnerable segments of the population. We refer to this vicious circle as a “climate-financial trap”. For each of these two dimensions, we construct vulnerability indexes for all countries. By combining these two dimensions, this study identifies different groups of countries facing a double vulnerability situation to varying degrees. As far as vulnerability to extreme weather events is concerned, many islands in the Pacific, Indian Ocean and Caribbean regions appear to be in a situation of double vulnerability. In addition, some Latin American coastal countries, two African countries and two Southeast Asian countries are also highly vulnerable. In terms of vulnerability to chronic deterioration in climate conditions, countries in the Mediterranean, Gulf of Aden and Middle East regions, as well as most of West African coastal countries, also fall into the group of highly vulnerable countries. Based on this analysis, this study assesses some empirical strategies and financial instruments which are likely to mitigate the primary consequences of climate change on the dynamics of public finances for the identified groups of countries. These strategies combine efforts to reduce (or to share) the rising and unpredictable costs of climate shocks in the short run and to maintain the fiscal space needed to support ambitious adaptation investment strategies, in order to mitigate the costs of future climate shocks in the long run. Whether such strategies can break the dynamics of the “climate-financial trap” remains an open question for further work.