Long-term Risk in EU Sovereign Debt: Focus on Climate and Demographics.

Climate and demographic risks moderately impact most EU countries' public debt trajectories, gaining credit-rating relevance and mutual reinforcement in the long term.

Population aging poses the greatest challenge, potentially increasing public debt by up to 21% of GDP on average across EU countries. An 'orderly' transition may lead to a 1% increase in debt, while a 'hothouse' scenario could result in a 3% increase. In addition, climate and demographic challenges are critical for sovereign credit assessments and should be integrated for long-term debt sustainability analysis.

The impacts of population aging and climate scenarios for EU countries were considered in this report. It was found that the EU-wide average hides regional differences, with the impact of population aging outweighing that of climate-related risks for most EU countries. However, this varies widely across the EU, with differing levels of carbon intensity and climate ambition being key factors.

The eastern and Baltic EU region has the weakest underlying debt dynamics, with increasing age-related costs projected to reach 91% of GDP by 2050. It's important to recognize uncertainties in long-term risk modeling, and although the scenarios presented are not forecasts, they offer useful insights for assessing long-term fiscal risks.

Finally, while Scope's modeling currently only includes chronic physical risks related to rising temperatures and transition risk, adaptation, carbon tax revenues, and economic windfalls from the green transition can help mitigate the impact on public debt levels in the EU.