IMF Working Papers

Credit Risk Where It’s Due: Carbon Pricing and Firm Defaults

By Stefan Löschenbrand, Martin Maier, Laurent Millischer, Florian Resch

March 28, 2025

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Format: Chicago

Stefan Löschenbrand, Martin Maier, Laurent Millischer, and Florian Resch. "Credit Risk Where It’s Due: Carbon Pricing and Firm Defaults", IMF Working Papers 2025, 062 (2025), accessed May 20, 2025, https://doi.org/10.5089/9798229005777.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This study investigates carbon pricing-induced credit risk, the potential negative impact of carbon pricing on firms’ ability to meet their financial obligations. Applying a well-established credit assessment model to a novel data set combining financial statements and emissions data, we subject the over 2.5 million borrowers of the euro area’s largest banking groups to two carbon pricing stress scenarios. Our findings reveal a notable variation in impacts between and within sectors. However, even under the conservative scenario, many firms experience only a minimal increase in their probabilities of default. In the more realistic scenario, the aggregate impact on firms’ creditworthiness is not material. The analysis further suggests that the capitalization of euro area banks would not be significantly affected by the carbon pricing-induced increase in corporate credit risk. While this study does not consider the macroeconomic transmission channels, it indicates that higher carbon prices are not likely to trigger widespread firm defaults and jeopardize financial stability.

Subject: Credit risk, Environment, Financial regulation and supervision, Financial statements, Greenhouse gas emissions, Public financial management (PFM)

Keywords: Carbon Pricing, Climate Change, Credit Risk, Financial statements, Firm default, Firm level, Global, Greenhouse gas emissions, IMF working paper WP, Pricing-induced credit risk, Stress scenario, Transition Risk

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