Journal of Energy Markets

Risk.net

Carbon pricing paths to a greener future, and potential roadblocks to public companies’ creditworthiness

Giorgio Baldassarri Höger von Högersthal, Arsene Lui, Hrvoje Tomičić and Luka Vidovic

  • Most governments worldwide are considering introducing (or increasing, where already available) a carbon tax penalizing firms with greenhouse gas (GHG) emissions, potentially impacting their financial performance and affecting their creditworthiness. Meanwhile, financial regulators in several jurisdictions are planning to include climate-linked scenarios in the annual bank stress testing exercise.
  • In this paper, we introduce a quantitative top-down approach to estimate how energy transition risk may impact the creditworthiness of public companies globally, within the next 30 years.
  • Leveraging company-specific CO2 emissions, country- and industry-specific carbon tax scenarios, and a market-driven probability of default (PD) model covering approximately 34 000 companies globally, we perform an empirical analysis incorporating both transition-related risks and opportunities.
  • Our findings suggest that the Utilities, Materials, Energy, and Consumer Staples sectors may be the most default-prone industries over a fast transition. In addition, several large-revenue companies in these sectors may default on their debt obligations over the next 30 years, thus potentially inducing important ripple effects in the economy, both at a national and global level.

As of April 23, 2019, 185 countries had ratified the 2015 Paris Agreement, committing to combating climate change and intensifying the actions and investments needed for a sustainable low-carbon future. One of the primary policy tools contemplated by governments was the introduction of (or increase in) a carbon tax to penalize firms producing greenhouse gas emissions, potentially impacting their financial performance and affecting their creditworthiness. Financial regulators in several jurisdictions plan to include climate-linked scenarios in the annual bank stress testing exercise. In this paper, we introduce a valuation-based approach to estimate how energy transition risk may impact the creditworthiness of public companies globally within the next thirty years. Leveraging company-specific carbon dioxide emissions, country- and industry-specific carbon tax scenarios and a market-driven probability of default model covering approximately 34 000 companies globally, we perform an empirical analysis incorporating both transition-related risks and opportunities. Our findings suggest that the utilities, materials, energy and consumer staples sectors may be the most default-prone industries over a fast transition. In addition, several large-revenue companies in these sectors may default on their debt obligations over the next thirty years, potentially inducing important ripple effects in the economy, at both a national and a global level.

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