N-LAS-IAM: Climate change in a balance-of-payments framework

Climate change is becoming a macro-financial development problem for peripheral economies, yet integrated assessment models remain poorly equipped to analyse climate vulnerability in externally constrained developing countries. Existing heterodox models are mostly closed or global, while balance-of-payments-constrained growth models treat climate in reduced form and incompletely formalise the financial channel. This paper introduces the N-LAS-IAM, a recursive framework coupling a Thirlwall–Hussain growth core with endogenous green structural change, capital flows under financial fragility, sovereign risk, and a climate module mapping global emissions into damages that feed back into profitability and sovereign fragility. Green structural change is endogenised through logistic diffusion equations governing trade income elasticities as functions of green R&D and the real exchange rate. The model is explored via Monte Carlo experiments in which damage intensity and climate-to-risk transmission vary while emissions, policy, and structural-change parameters remain fixed. Three results emerge. First, higher damage produces a more fragile debt regime with elevated spreads, tighter financing, and prolonged deleveraging. Second, damages widen the elasticity gap between exports and imports, slowing green upgrading and locking the economy into lower-sophistication trade patterns. Third, the damage-to-fragility relationship is nonlinear: below a threshold the economy absorbs shocks, but above it a self-reinforcing regime emerges where lower productivity, higher spreads, weaker inflows, and structural regression feed on one another. These findings suggest that physical damages erode policy capabilities by raising external finance costs when green investment is most needed, and that early mitigation may yield convex macroeconomic returns for peripheral economies under balance-of-payments constraints.