Allow me to share that I published my second working paper for the Asian Development Bank: Impact of Climate Risk on Fiscal Space: Do Political Stability and Financial Development Matter? Co-written by Beirne, John; Park, Donghyun; Saadaoui, Jamel; Uddin, Gazi Salah, ADB Economics Working Paper No. 748.
This paper explores how climate risks adversely affect fiscal space using panel local projections covering 199 economies spanning from 1990 to 2022. The findings highlight the impact on economies most vulnerable to climate change. The results suggest that factors such as political stability and financial development have the potential to alleviate these effects. It reveals that the influence of climate risk on fiscal capacity is more significant in situations of limited fiscal space. Implementing fiscal consolidation emerges as a crucial factor in mitigating the negative impact of climate risks on fiscal capacity, with political stability and financial development also playing pivotal roles.
On the whole, we find that political stability together with financial development matter for the negative impact of climate risks on fiscal space (higher bond yields and lower sovereign ratings for foreign currency debt at the horizon of two years).
In particular, we find that lower risks of religious tensions preserve fiscal space in the wake of climate risk shocks. Religious tensions are defined in the ICRG dataset (PRS group) and range from 0 (worst) to 6 (best):
“Religious tensions may stem from the domination of society and/or governance by a single religious group that seeks to replace civil law by religious law and to exclude other religions from the political and/or social process; the desire of a single religious group to dominate governance; the suppression of religious freedom; the desire of a religious group to express its own identity, separate from the country as a whole.
The risk involved in these situations ranges from inexperienced people imposing inappropriate policies through civil dissent to civil war.”
I made a heat plot for the lower decile (higher risks) of religious tension risks:

Below, I reproduce the result in the paper. Lower risks of religious tensions preserve fiscal space in the wake of climate risk shocks:

