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Pricing climate transition risk: Evidence from European corporate CDS

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  • 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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    Cited by:

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    3. Renatas Kizys & Ramzi Benkraiem & Panagiotis Tzouvanas, 2026. "Sustainable governance and energy transition," Post-Print hal-05537261, HAL.
    4. Abinzano, Isabel & Corredor, Pilar & Mansilla-Fernández, José Manuel, 2026. "Physical climate risk and banks’ credit risk: Worldwide evidence," The North American Journal of Economics and Finance, Elsevier, vol. 81(C).
    5. Chang, Shuangshuang & Qin, Meng & Hsueh, Hsin-Pei & Lobont, Oana-Ramona, 2025. "Could U.S.-China conflicts intensify climate transition risks?," Economic Analysis and Policy, Elsevier, vol. 86(C), pages 1592-1604.
    6. Qiu, Lianhong & Wong, Xiaoqing & Zhang, Teng & Song, Yubing, 2025. "How do climate risks intersect with the rise of new energy vehicles in China?," Economic Analysis and Policy, Elsevier, vol. 87(C), pages 675-688.

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    Keywords

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    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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