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BIPR | Robert A. Mundell Global Risk Memorial Lecture - Climate Risk and Sovereign Debt
Robert A. Mundell Global Risk Memorial Lecture - Climate Risk and Sovereign Debt

October 31, 2022 - 11:30

Ugo Panizza, Graduate Institute of International and Development Studies, Switzerland

Event Recap

Professor Ugo Panizza ushered in the 5th Robert A. Mundell Global Risk Memorial Lecture with an in-depth walk through of the latest Geneva report he recently co-authored. The report addresses the linkage between country debt and climate change, examines how climate change may affect countries' fiscal space, looks at alternative debt financing options and, finally, discusses a few policy recommendations.

At the current global rate of carbon emissions, only 8 years remain before we reach the critical 1.5-degree temperature increase, which is at the core of the Paris Agreement. The data show a strong correlation between income and carbon emissions levels; high income countries are the ones who emit the most. However, when we look at the income and climate-change vulnerability nexus, we find that low-income countries are the ones who are likely to suffer the most from climate change and, thus, who need to make the greatest effort to invest in adaptation. The big question is: how will these investments be financed?

We also see that countries with low-income levels are more likely to face debt distress, their situation is exacerbated by the negative shocks of climate change. Are there financial solutions that may address the debt crisis of low-income countries and the global climate change crisis at the same time? To answer this question Panizza reviews financing proposals, which have the potential to simultaneously address debt relief and create incentives for the reduction of global carbon emissions.

First, he considers 'green bonds', that is, bonds issued by sovereign entities, with a promise attached of using the funds for activities that either help mitigate or adapt to climate change. Panizza argues these bond agreements are too vague however, and promises of enforcement are quite scant, making them less than ideal. Secondly, Panizza discusses the option of a 'carbon credit market' – the creation of a market that caps emissions and allows for trade. This would set up an important source of income for developing countries that could improve their financial outlook and could be a feasible policy option. Finally, Panizza argues in favour of climate conditionality in debt restructuring – a structure that allows negotiations between indebted countries and the IMF - allowing some of the countries' debt to be cancelled in exchange for the country committing to use the money for specific climate change mitigation or adaption goals. A way to make this conditionality stick is through sustainably linked bonds', with the incentive being if the goals are reached, then countries will receive a discount in the coupons.

In conclusion, Panizza argues that there are options that do address both countries' debt and the on-going climate crises. He discusses how the most favourable policies will create a market for sustainably linked bonds, have a credible monetary mechanism, have an annual target for fiscal support for climate adaption, and contain a clear legal framework and verification mechanisms. Panizza finally argues that whichever route is taken to address the twin crises, it must be fair, scalable, and politically feasible. He concludes the talk by saying that hopefully this will not be another Mundellian impossible trinity.

Full Audio:

Robert A. Mundell Global Risk Memorial Lecture - Climate Risk and Sovereign Debt
Johns Hopkins SAIS Global Risk Conference

hosted by Professor Michael G. Plummer

Ugo Panizza
Graduate Institute of International and Development Studies, Switzerland

SAIS Europe students, faculty, staff, and guests are allowed to attend in person at SAIS Europe, via B. Andreatta 3, Bologna. To participate online, please register for the webinar.

Robert A. Mundell (1932-2021) was a member of the Johns Hopkins SAIS international economics faculty and taught at SAIS Europe for four years, during the period 1959-2001. Much of his pioneering work in monetary dynamics and optimum currency areas, which resulted in his Nobel Memorial Prize in Economic Science in 1999, was conducted during his time in Bologna.

The Lecture is part of the broader Johns Hopkins SAIS Global Risk Conference which has been made possible with the generous support of Mr. James K. Anderson, SAIS Europe Alumnus and Advisory Council member, and Johns Hopkins University Trustee.

Ugo Panizza is Professor of Economics and Pictet Chair in Finance and Development at the Graduate Institute of International and Development Studies in Geneva. He is also the Director of the International Centre for Monetary and Banking Studies (ICMB), a Vice President of CEPR, Fellow of the Fondazione Luigi Einaudi, and Editor of the journals Oxford Open Economics and International Development Policy.

Prior to joining the Institute, he was the Chief of the Debt and Finance Analysis Unit at the United Nations Conference on Trade and Development (UNCTAD) and a Senior Economist in the Research Department of the Inter-American Development Bank. Panizza also worked at the World Bank and taught at the American University of Beirut and at the University of Torino.
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