Zusammenfassung:
Using Credit Default Swap spreads, we construct and validate a forward-looking, market-implied carbon risk (CR) factor that captures how lenders price firms' exposure to carbon regulation. The credit-risk impact of carbon regulation depends on its scope (breadth of coverage), stringency (share of emissions regulated), and the speed of mandated decarbonisation. Explicit carbon pricing sharpens lenders' evaluations of risk: for regulated firms, the cost of credit protection triples. This impact intensifies with a greater proportion of a firm's direct emissions subject to regulation and varies by sector. Upward shifts in the term-structure CR factor lead lenders to anticipate that most financial impacts will materialise in the near term, underscoring the potential abruptness of transition-related repricing.