Carbon regulatory risk exposure in the bond market: A quasi-natural experiment in China

Peng Zhou, Lingyu Mo, Changchun Tan and Huaqing Wu

China Economic Review, 2025, vol. 92, issue C

Abstract: This study aims to examine the causal effect of carbon regulatory risk on corporate bond yield spreads in emerging markets through empirical analysis. Exploiting China's commitment to peak CO2emissions before 2030 and achieve carbon neutrality before 2060 as an exogenous shock to an unexpected increase in carbon regulatory risk, we perform a difference-in-difference-in-differences (DDD) strategy. We find that exposure to carbon regulatory risk leads to an increase in bond yield spreads for carbon-intensive firms located in regions with stricter regulatory enforcement. This positive relationship is more pronounced for firms with financing constraints, belonging to more competitive industries, and located in regions with a high marketization process. We further identify that higher earnings uncertainty and increased investor attention serve as two mechanisms by which carbon regulatory risk influences the yield spreads of corporate bonds. Moreover, the spread decomposition reveals that the rise in bond yield spreads after an increase in carbon regulatory risk is primarily driven by the rise in default risk rather than the rise in liquidity risk. Overall, our findings highlight the importance of considering carbon regulatory risk exposure in financial markets, especially in developing economies like China.

Keywords: Carbon regulatory risk; Carbon peaking and carbon neutrality; Corporate bond yield spread; Default spread; Liquidity spread (search for similar items in EconPapers)
JEL-codes: G32 Q51 Q58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:92:y:2025:i:c:s1043951x25000811

DOI: 10.1016/j.chieco.2025.102423

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