The cost and benefit of GHG emissions and default risk

This paper examines the relationship between the financial costs associated with carbon emissions and the intensity of green revenues relative to emissions and firmlevel default risk. Contributing to the ongoing debate on emissions measurement approaches, we construct two novel intensity measures that capture the monetary value of emissions: average carbon cost (Cost/GHG) and green-revenue intensity (GR/GHG). Using global firm-level data from 2008 to 2022, we find that exposure to carbon costs is strongly associated with increased default risk, while the evidence for green-revenue intensity is more modest and does not translate into a clear reduction in marketimplied default probabilities. On average, a $1,000 increase in carbon cost per tonne of emissions is associated with a 0.70 percentage point rise in the probability of default and a reduction in Distance-to-Default, and these relationships remain robust when absorbing time-varying industry cycles and country-level macro and policy conditions. The association between carbon-cost exposure and default risk is most pronounced in high transition-risk sectors and is weaker in firms with higher managerial ability and operational efficiency. Overall, the results highlight the importance of incorporating monetary valuations of transition exposures when assessing climate-related credit risk.