Carbon Default Swap - Disentangling the Exposure to Carbon Risk through CDS

Alexander Blasberg, Rüdiger Kiesel and Luca Taschini

No 10016, CESifo Working Paper Series from CESifo

Abstract: Using Credit Default Swap spreads, we construct and validate a forward-looking, market-implied carbon risk (CR) factor and show that the impact of carbon regulations on firms’ credit risk varies with the regulation’s scope and stringency, and with the speed of mandated carbon reduction. We find that explicit carbon pricing sharpens lenders’ evaluations, resulting in firms under such regimes incurring three times the additional credit protection costs. This impact escalates with the proportion of a firm’s direct emissions subject to regulation – the policy’s stringency – and varies by the sector in which the firm operates. With an increase in the CR factor, lenders foresee higher costs for short-term transitions.

Keywords: carbon risk; climate change; climate finance; credit risk; transition risk (search for similar items in EconPapers)
JEL-codes: C21 C23 G12 G32 Q54 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Carbon default swap – disentangling the exposure to carbon risk through CDS (2023)
Working Paper: Carbon default swap – disentangling the exposure to carbon risk through CDS (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10016

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