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

Blasberg, Alexander, Kiesel, Rüdiger and Taschini, Luca ORCID: 0000-0001-5355-1736 (2024) Carbon default swap – disentangling the exposure to carbon risk through CDS. Grantham Research Institute on Climate Change and the Environment Working Papers (391). Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, UK.

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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.

Item Type:	Monograph (Working Paper)
Official URL:	https://www.lse.ac.uk/granthaminstitute/publicatio...
Additional Information:	© 2024 The Author(s)
Divisions:	Grantham Research Institute
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HG Finance H Social Sciences > HC Economic History and Conditions
JEL classification:	C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C21 - Cross-Sectional Models; Spatial Models; Treatment Effect Models C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C23 - Models with Panel Data G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate; Natural Disasters
Date Deposited:	23 Jun 2025 13:27
Last Modified:	23 Jun 2025 23:15
URI:	http://eprints.lse.ac.uk/id/eprint/128528

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