Abstract
Given the increasing concerns about the carbon risk’s influence on economy, this paper is aimed at exploring the impact of carbon emission on credit risk, measured by credit default swap. By using monthly updated data of 363 unique US companies among a period between 2007 and 2020, we uncover that firm’s direct carbon emission increases its CDS spreads, whereas indirect emission is not priced by credit market seriously. Considering dynamic effects of carbon risk, we find a positive correlation between carbon risk and the CDS term structure, which implies that carbon risk’s influence on long-term concern of credit risk can be more pronounced. Using exogenous shock: Paris Agreement, our finding remains robust. Finally, we also examine potential channels, including companies’ sustainability awareness, green transition willingness, and ability, through which carbon risk is priced among the credit market. This paper provides further evidence of carbon credit premium and contributes to the implications of carbon cutting activities.
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Some or all data, models, or codes generated or used during the study are available from the corresponding author upon request.
Notes
Climate Bonds Market Intelligence (CBMI).
CDP’s 2016 Climate Change Report.
“Paris climate deal: Trump announces US will withdraw.” BBC News. June 1, 2017.
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This work was supported by the Major Program of National Fund of Philosophy and Social Science of China (CN) (grant number 18ZDA040).
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Yuqi Zhang: conceptualization, supervision, funding acquisition, and validation. Yaorong Liu: methodology, investigation, and writing original draft preparation. Haisen Wang: data curation, software, visualization, writing, reviewing, and editing.
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Zhang, Y., Liu, Y. & Wang, H. How credit default swap market measures carbon risk. Environ Sci Pollut Res 30, 82696–82716 (2023). https://doi.org/10.1007/s11356-023-28154-z
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DOI: https://doi.org/10.1007/s11356-023-28154-z