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Counting the carbon burden: Evidence from municipal bonds in China

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  • Li, Yi
  • Li, Yang
  • Wang, Zhaohua

Abstract

This paper examines how carbon emissions affect municipal corporate bond (MCB) pricing in China. Using data from 2008–2022, we find that higher emissions lead to wider credit spreads. To address endogeneity, we use a difference-in-differences strategy and an instrumental variable approach, both confirming the results. Mechanism analysis shows that carbon emissions widen credit spreads by weakening implicit guarantees, reducing repayment capacity, and lowering investor demand. The effect is stronger in developed cities, those with limited refinancing capacity, lower marketization, lower fiscal transparency, and after 2020. These findings highlight the financial implications of environmental risk in municipal bond markets.

Suggested Citation

  • Li, Yi & Li, Yang & Wang, Zhaohua, 2025. "Counting the carbon burden: Evidence from municipal bonds in China," Energy Economics, Elsevier, vol. 148(C).
    • Handle: RePEc:eee:eneeco:v:148:y:2025:i:c:s0140988325005171
    DOI: 10.1016/j.eneco.2025.108690
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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