Climate Change Risks and Consequences on Growth and Debt-Sustainability in Africa

Abstract Average temperature in Africa has been rising steadily from the baseline of climatology prevailing during 1951–1980. The findings in this paper suggest that real GDP growth would start declining for annual temperature higher than 0.7 °C. About 45 African countries already registered annual temperature rise above 0.7 °C in 2020 underscoring the seriousness of climate change induced risks for long term growth. In addition, frequency of major natural disasters tends to exacerbate political instability and conflict. Combined, these shocks have a direct effect on the sustainability of debt. Using a simple debt dynamics framework, the paper shows that the debt-burden could increase 2.4 times due to climate change induced shocks. In addition, modelling results show that carbon pricing could be an effective way of helping to meet the Nationally Determined Contributions. However, carbon pricing would have negative impacts on energy-intensive industries and increase the prices of the goods and services they provide. There will also be job losses in these industries. The combined effect of these impacts could be reduction in GDP growth and real incomes. It is recommended that part of the revenues generated from the carbon tax could be used to address the negative impacts on vulnerable groups.