Carbon risk and sovereign bond risk premiums

This study explores the impact of climate change-related risks on the sovereign bond market, employing a fixed-effects panel regression analysis across 36 countries from 2000 to 2022. The results reveal that both physical (vulnerability index) and transitional (carbon emissions) climate risks lead to an increase in sovereign bond spreads. This effect is especially pronounced among middle-income countries, which lie between the high macroeconomic volatility of lower-income countries and the stable capital markets and strong institutional credibility of higher-income countries. The less developed institutions in middle-income nations seem to make climate risks more evident and directly influential on sovereign risk premiums.