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Pricing climate transition risk: Evidence from European corporate CDS

Author

Listed:
  • Costola, Michele
  • Vozian, Katia

Abstract

The European low-carbon transition towards net-zero emissions by 2050 is gaining momentum. This study analyzes a major European firm’s climate-related transition indicators and their impact on CDS-implied credit risk across different time horizons. Results reveal market pricing of transition risk across all tenors, especially since the 2015 Paris Agreement. Carbon-intensive sectors like Electricity, Gas, and Mining face heightened transition risk pricing. Interestingly, the market may undervalue a company’s transition risk management efforts and participation in the EU ETS, possibly due to market inefficiencies. Predicting allowance prices’ impact on financial performance in the EU ETS market is notably challenging due to unique supply–demand dynamics.

Suggested Citation

  • Costola, Michele & Vozian, Katia, 2025. "Pricing climate transition risk: Evidence from European corporate CDS," Energy Economics, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:eneeco:v:143:y:2025:i:c:s0140988325000714
    DOI: 10.1016/j.eneco.2025.108248
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    More about this item

    Keywords

    Climate change; Transition risk; Credit risk; Credit default swap; Emissions trading system (ETS); Financial markets;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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