Carbon pricing paths to a greener future, and potential roadblocks to public companies’ creditworthiness

Giorgio Baldassarri Höger von Högersthal, Arsene Lui, Hrvoje TomiÄ ić and Luka Vidovic

Journal of Energy Markets

Abstract: As of April 23, 2019, 185 countries had ratified the 2015 Paris Agreement, committing to combating climate change and intensifying the actions and investments needed for a sustainable low-carbon future. One of the primary policy tools contemplated by governments was the introduction of (or increase in) a carbon tax to penalize firms producing greenhouse gas emissions, potentially impacting their financial performance and affecting their creditworthiness. Financial regulators in several jurisdictions plan to include climate-linked scenarios in the annual bank stress testing exercise. In this paper, we introduce a valuation-based approach to estimate how energy transition risk may impact the creditworthiness of public companies globally within the next thirty years. Leveraging company-specific carbon dioxide emissions, country- and industry-specific carbon tax scenarios and a market-driven probability of default model covering approximately 34 000 companies globally, we perform an empirical analysis incorporating both transition-related risks and opportunities. Our findings suggest that the utilities, materials, energy and consumer staples sectors may be the most default-prone industries over a fast transition. In addition, several large-revenue companies in these sectors may default on their debt obligations over the next thirty years, potentially inducing important ripple effects in the economy, at both a national and a global level.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ2:7565726

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