Carbon Risk and Default Risk

Martin Hellmich and Rüdiger Kiesel

Chapter 10 in Carbon Finance:A Risk Management View, 2021, pp 199-217 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this chapter, we investigate how carbon risk affects the pricing of default-risky assets. We focus on credit CDS and (corporate) bonds, with an emphasis on the former as CDS spreads are a liquid and forward-looking indicator for the credit quality of a firm. Furthermore, CDS contracts are standardised with maturities up to 30 years and thus suitable to explore term structure effects of carbon risk. The risk premium that CDS spreads exhibits is purer than that of corporate bonds as there are no liquidity or structural effects.

Keywords: Climate Finance; Carbon Risks; Transition Risks; Emission Certificates; Green Bonds; Carbon Credits; Stress Tests; Machine Learning; Physical Risks; Carbon Markets; Carbon Disclosure; Carbon-Intensity; Commodity Markets; Climate Economics; Climate Risks; Big Data; Emission Certificates; Carbon Investors; Divestment (search for similar items in EconPapers)
JEL-codes: G1 G32 Q5 Q54 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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