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

IMF Working Papers, March 28, 2025

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Investigates carbon pricing-induced credit risk, defined as the potential negative impact of carbon pricing on firms’ ability to meet their financial obligations.
Applies a well-established credit assessment model to a novel data set combining financial statements and emissions data.
Subjects the over 2.5 million borrowers of the euro area’s largest banking groups to two carbon pricing stress scenarios.

There is notable variation in impacts between and within sectors.
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 suggests that the capitalization of euro area banks would not be significantly affected by the carbon pricing-induced increase in corporate credit risk.
The study does not consider macroeconomic transmission channels; within this limitation, higher carbon prices are not likely to trigger widespread firm defaults and jeopardize financial stability.

Carbon pricing, per the scenarios analyzed, is unlikely on its own to cause widespread firm defaults across the euro area.
Banking-sector capitalization appears resilient to the direct corporate credit-risk effects modeled.
Consideration of macroeconomic transmission channels remains necessary for a fuller assessment of systemic impacts (not covered in this study).