Climate Vulnerability and Sovereign Debt Accumulation

I test whether structural climate vulnerability has a long-run cointegrating relationship with sovereign debt accumulation across 27 Small Island Developing States over 2000–2023. Using a panel Vector Error Correction Model, I find that a one-unit increase in the ND-GAIN vulnerability score is associated with approximately 105 percentage points more sovereign debt in the long run, independently of income, fiscal policy, and global shock regimes.

The error correction is asymmetric: debt adjusts toward its vulnerability-implied equilibrium at 16% per year while vulnerability adjusts upward — a ratchet dynamic consistent with the structural constraints on SIDS debt management. Regional heterogeneity confirms the mechanism: the relationship is strongest where structural exposure is most severe, and weakest in Pacific SIDS where grant-based financing partially decouples debt from vulnerability.

These findings provide direct empirical support for the UN Multidimensional Vulnerability Index (Resolution A/78/L.98, August 2024): if vulnerability drives long-run debt independently of income, income-based eligibility criteria systematically exclude the countries most in need.