Credit Default Swaps and Corporate Carbon Emissions in Japan

         
Author Name OKIMOTO Tatsuyoshi (Research Associate, RIETI) / TAKAOKA Sumiko (Seikei University)
Creation Date/NO. October 2022 22-E-098
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Abstract

We examine the relationship between carbon emissions and the market perception of firms' default risk measured by corporate credit default swap (CDS) spreads in Japan. While corporate revenue size is the most significant factor of carbon emissions, pressure from investors has a significant decreasing effect on carbon emissions, which is greater for investment-grade companies. We find that carbon emissions have time-varying effects on corporate CDS spreads, which supports the “investor awareness” hypothesis across sectors and credit quality. The sectoral impacts indicate that carbon emissions are priced prominently in the CDS spreads of firms in sectors where the transition to carbon-free energy sources appears relatively less complicated and less expensive. Finally, we report the impacts of carbon emissions on the CDS spread curve, where they are priced in both short- and long-term CDS spreads, and high carbon emissions steepen the CDS spread curve.