Credit risk in the face of climate change and climate policies

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Speaker: Rasmus Lønn, Assistant Professor, Erasmus University Rotterdam

This study examines how physical climate risks and climate transition policies shape credit risk in bond markets. Using a threshold-based credit migration framework, it links latent credit factors to macroeconomic and climate-related indicators and estimates the model on historical US rating transitions. Alternative climate policy scenarios generate markedly different credit risk paths, with large implications for expected losses and tail risks. High-quality bonds are particularly sensitive to policy design, and while orderly transitions entail higher near-term costs, they deliver lower aggregate losses by mid-century relative to disorderly pathways. You can also join us virtually on Zoom.

The weekly climaTRACES workshops, organised by Kamiar Mohaddes and Henning Zschietzschmann, are attended by a diverse group of people from economics, geography, politics, engineering, business, earth sciences, natural sciences and history, generating interdisciplinary discussion. One person leads the session, on either a paper they have written, a work in progress or just an idea they have and would like feedback on. This is also an opportunity for people to find our more about the team on what climaTRACES have been up to and what future events and research projects are being developed.

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No registration required. If you have any questions about this seminar, please email Henning Zschietzshmann.