Is carbon risk a determinant of corporate bond credit risk? Focus on the U.S. utilities sector.
- Submitted in partial fulfillment of the degree Master of Arts in Law and Diplomacy at the Fletcher School of Law and Diplomacy. Abstract: Climate change is an increasing concern in financial markets due to the uncertainties arising from its physical impacts and to the consequences of climate mitigation on our economies. This paper aims at analyzing whether carbon risk is a determinant of corporate... read morebond credit risk in the United States, with a particular focus on the utilities sector, which is the most carbon-intensive sector in the country. For the purpose of this study, carbon risk entails risks faced by carbon extractors and emitters emerging from potential future climate liabilities or from regulatory and technological changes associated with the transition to a low-carbon economy. The fundamental hypothesis underlying the analysis is that carbon risk can affect the solvency of carbon-intensive borrowers by exposing them to costly legal and regulatory risk. An empirical econometrics study was realized to test this theory. Although the results found no average impact of carbon risk on credit spread for new bond issues over the whole sample period, a deeper analysis revealed that carbon risk did not impact credit spread in the early years of this study (2010 through 2013), but had a small-to-moderate impact in 2014 and a non-existent-to-small impact in 2015.read less