FLM Research: Carbon Default Swap – Disentangling the Exposure to Carbon Risk Through CDS

Speaker

Luca Taschini is an economist whose research is interdisciplinary and covers economics and applied finance. It cuts across the fields of environmental and resource economics, financial economics and industrial organisation.

He is Professor of Climate Change Finance at the University of Edinburgh Business School and Visiting Senior Research Fellow at the Grantham Research Institute, LSE.

Luca is a member of the CESifo research network, and was previously a visiting scholar at MIT and Ritsumeikan University, Japan.

Title

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

Abstract

Using credit default swap spreads, we construct a forward-looking and market-implied carbon risk factor and show that carbon risk affects the credit spread of firms. The effect is larger for European firms than for North American firms and varies considerably across sectors, suggesting that the market recognises where and which sectors are best positioned for a transition to a low-carbon economy. In addition, lenders require greater credit protection for borrowers perceived to be more exposed to carbon risk when market-wide concern about climate change risk is high. Finally, lenders expect adjustments to carbon regulation in Europe to result in relatively higher policy costs in the near future.

To read the working paper, click here

Practical information

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