Bridging socioeconomic pathways of CO2 emission and credit risk

Florian Bourgey (1, 2) , Emmanuel Gobet (1) , Ying Jiao (3)

1 CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique
2 Bloomberg L.P. Quantitative Finance Research
3 ISFA - Institut de Science Financière et d'Assurances

This paper investigates the impact of transition risk on a firm's low-carbon production. As the world is facing global climate changes, 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 more comprehensive socioeconomic context. In this paper, 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 the adopted strategies by following different SSPs scenarios may influence the firm's default probability.

Mots clés: Climate risk; transition risk; credit risk; Shared Socioeconomic Pathways; carbon emission reduction; optimal production profit

Domaines: Probabilités [math.PR]; Gestion des risques [q-fin.RM]; Milieux et Changements globaux

Florian Bourgey, Emmanuel Gobet, Ying Jiao. Bridging socioeconomic pathways of CO2 emission and credit risk. 2021. ⟨hal-03458299v1⟩