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The European Carbon Bond Premium

Author

Listed:
  • Dirk Broeders
  • Marleen de Jonge
  • David Rijsbergen

Abstract

We document a positive and statistically significant carbon premium that investors demand for investing in bonds issued by high carbon-emitting firms in the euro area. Over the entire sample period, we estimate that doubling a firm’s Scope 1 and 2 emissions results in an average increase of 6.6 basis points in the spread on the firm’s issued bonds. In addition, we find that the carbon premium has increased since 2020 and the effect reached 13.9 basis points by early 2022. These results suggest that European companies with high levels of carbon emissions are experiencing progressively higher financing costs. Our research also reveals a distinctive carbon premium term structure, rising with longer maturities. Interestingly, over time the term structure flat tens, suggesting investors’ confident anticipation of ongoing carbon pricing in the European Union at a stable pace.

Suggested Citation

  • Dirk Broeders & Marleen de Jonge & David Rijsbergen, 2024. "The European Carbon Bond Premium," Working Papers 798, DNB.
    • Handle: RePEc:dnb:dnbwpp:798
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    File URL: https://www.dnb.nl/media/3njod3e5/working_paper_no-798.pdf
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    More about this item

    Keywords

    Carbon Premium; Carbon Premium Term Structure; Climate Change; Climate Transition Risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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