Carbon default swap - from brownian motion to carbon risk

Using Credit Default Swap spreads, a forward-looking, market-implied carbon risk factor has been constructed and it shows that carbon risk affects firms' credit spread. The effect is larger for European than North American firms and varies across industries, indicationg which sectors are better positioned for a transition to a low-carbon economy. Furthermore, lenders demand more credit protection for those borrowers that are more exposed to carbon risk whe market-wide concern about climate change risk is elevated.