Bridging socioeconomic pathways of $$\textrm{CO}_2$$ CO 2 emission and credit risk

Florian Bourgey (), Emmanuel Gobet () and Ying Jiao ()
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Florian Bourgey: CMAP, CNRS, Ecole Polytechnique, Institut Polytechnique de Paris
Emmanuel Gobet: CMAP, CNRS, Ecole Polytechnique, Institut Polytechnique de Paris
Ying Jiao: Université Claude Bernard - Lyon 1

Annals of Operations Research, 2024, vol. 336, issue 1, No 40, 1197-1218

Abstract: Abstract This paper investigates the impact of transition risk on a firm’s low-carbon production. As the world is facing global climate change, the Intergovernmental Panel on Climate Change (IPCC) has set the idealized carbon-neutral scenario around 2050. In the meantime, many carbon reduction scenarios, known as Shared Socioeconomic Pathways (SSPs) have been proposed in the literature for different production sectors in a more comprehensive socio-economic context. We consider, on the one hand, a firm that aims to optimize its emission level under the double objectives of maximizing its production profit and respecting the emission mitigation scenarios. Solving the penalized optimization problem provides the optimal emission according to a given SSP benchmark. On the other hand, such transitions affect the firm’s credit risk. We model the default time by using the structural default approach. We are particularly concerned with how, by following different SSPs scenarios, the adopted strategies may influence the firm’s default probability.

Keywords: Climate risk; Transition risk; Credit risk; Shared socioeconomic pathways; Carbon emission reduction; Optimal production profit; Structural credit model; 91B38; 91G40 (search for similar items in EconPapers)
JEL-codes: C61 G32 G38 Q54 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10479-022-05135-y

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