Assessing the joint risks of fiscal crises and climate change

We empirically examine the potential trade-off between reducing vulnerability to climate change and maintaining fiscal stability. Our findings indicate that governance, as a measure of institutional quality, is the key determinant of both fiscal stability and climate change preparedness. Thus, higher levels of institutional quality result in increased preparedness for climate hazards and a lower likelihood of fiscal crises. However, our survival analysis also highlights that fiscal stability is contingent upon the interest paid on debt, rather than solely the overall debt burden. Considering these findings, international efforts to address the consequences of climate change should aim to maintain relatively constant interest payments on debt among emerging and low-income countries during their ecological transition. Our results further suggest that enhancing human habitat conditions, while considering the role of governance, is the most effective means of simultaneously reducing the likelihood of a fiscal crisis and increasing preparedness for climate hazards.