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Bridging socioeconomic pathways of $$\textrm{CO}_2$$ CO 2 emission and credit risk

Author

Listed:
  • Florian Bourgey

    (CMAP, CNRS, Ecole Polytechnique, Institut Polytechnique de Paris
    Bloomberg L.P.)

  • Emmanuel Gobet

    (CMAP, CNRS, Ecole Polytechnique, Institut Polytechnique de Paris)

  • Ying Jiao

    (Université Claude Bernard - Lyon 1)

Abstract

This paper investigates the impact of transition risk on a firm’s low-carbon production. As the world is facing global climate change, the Intergovernmental Panel on Climate Change (IPCC) has set the idealized carbon-neutral scenario around 2050. In the meantime, many carbon reduction scenarios, known as Shared Socioeconomic Pathways (SSPs) have been proposed in the literature for different production sectors in a more comprehensive socio-economic context. We consider, on the one hand, a firm that aims to optimize its emission level under the double objectives of maximizing its production profit and respecting the emission mitigation scenarios. Solving the penalized optimization problem provides the optimal emission according to a given SSP benchmark. On the other hand, such transitions affect the firm’s credit risk. We model the default time by using the structural default approach. We are particularly concerned with how, by following different SSPs scenarios, the adopted strategies may influence the firm’s default probability.

Suggested Citation

  • Florian Bourgey & Emmanuel Gobet & Ying Jiao, 2024. "Bridging socioeconomic pathways of $$\textrm{CO}_2$$ CO 2 emission and credit risk," Annals of Operations Research, Springer, vol. 336(1), pages 1197-1218, May.
    • Handle: RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-022-05135-y
    DOI: 10.1007/s10479-022-05135-y
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    More about this item

    Keywords

    Climate risk; Transition risk; Credit risk; Shared socioeconomic pathways; Carbon emission reduction; Optimal production profit; Structural credit model;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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