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

_IMF Working Papers, March 28, 2025_

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**Canonical URL:** [Credit Risk Where It’s Due: Carbon Pricing and Firm Defaults](https://www.imf.org/en/publications/wp/issues/2025/03/28/credit-risk-where-its-due-carbon-pricing-and-firm-defaults-565666)

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## Bibliographic details
- Authors: Stefan Löschenbrand, Martin Maier, Laurent Millischer, Florian Resch
- Published: March 28, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229005777.001

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### Study objective and methodology
- 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.

### Key findings
- 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.

### Policy implications and conclusions
- 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).

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2025/03/28/credit-risk-where-its-due-carbon-pricing-and-firm-defaults-565666_