Carbon default swap – disentangling the exposure to carbon risk through CDS

Alexander Blasberg, Rüdiger Kiesel and Luca Taschini

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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)
Pages: 67 pages
Date: 2024-06-10
References: Add references at CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/128528/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:128528

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().