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

Abstract

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.