Carbon Default Swap – Disentangling the Exposure to Carbon Risk Through CDS

50 Pages Posted: 3 Jun 2021 Last revised: 8 Jan 2023

See all articles by Alexander Blasberg

Alexander Blasberg

University of Duisburg-Essen

Ruediger Kiesel

University of Duisburg-Essen - Faculty of Economic Science

Luca Taschini

University of Edinburgh Business School; London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment

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Date Written: May 31, 2021

Abstract

Using Credit Default Swap spreads, we construct a forward-looking, market-implied carbon risk factor and show that carbon risk affects firms’ credit spread. The effect is larger for European than North American firms and varies substantially across industries, suggesting the market recognizes where and which sectors are better positioned for a transition to a low-carbon economy. Moreover, lenders demand more credit protection for those borrowers perceived to be more exposed to carbon risk when market-wide concern about climate change risk is elevated. Lenders expect that adjustments in carbon regulations in Europe will cause relatively larger policy-related costs in the near future.

Keywords: Climate Change, Carbon Risk, Credit Risk, Credit Default Swap Spreads

JEL Classification: C21, C23, G12, G32, Q54

Suggested Citation

Blasberg, Alexander and Kiesel, Ruediger and Taschini, Luca, Carbon Default Swap – Disentangling the Exposure to Carbon Risk Through CDS (May 31, 2021). Available at SSRN: https://ssrn.com/abstract=3856993 or http://dx.doi.org/10.2139/ssrn.3856993

Alexander Blasberg (Contact Author)

University of Duisburg-Essen ( email )

Universitätsstraße 2
Essen, NRW 45141
Germany

Ruediger Kiesel

University of Duisburg-Essen - Faculty of Economic Science ( email )

Essen, 45117
Germany

HOME PAGE: http://www.lef.wiwi.uni-due.de/

Luca Taschini

University of Edinburgh Business School

29 Buccleuch Pl
Edinburgh, Edinburgh EH8 9JS
United Kingdom

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

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