24 January 2023
New working paper on Carbon Default Swap from Chair of Climate Change Finance, Luca Taschini.
In this paper Luca Taschini and his co-author use Credit Default Swap (CDS) spreads to construct a forward-looking, market-implied carbon risk factor and study how, where and when carbon risk affects firms’ creditworthiness by examining whether firms’ exposure to carbon risk is reflected in the market prices of their CDS contracts.
Essentially, the carbon risk factor is constructed as the difference between the daily median CDS spreads of high-emission-intensity (polluting) firms and low-emission-intensity (clean) firms. This difference is used to identify how the lenders market perceives the differential exposure of polluting and clean firms to carbon risk.