Working Paper: CEPR ID: DP12928
Authors: Winta Beyene; Manthos Delis; Kathrin De Greiff; Steven Ongena
Abstract: What is the role market- and bank-based debt plays in the climate transition process? We present evidence that bond markets price the risk that reserves held by fossil fuel firms strand, while banks inthe syndicated loan market do not. Consequently, fossil fuel firms increasingly rely less on bonds and more on loans. We interpret the within-firm bond-to-loan substitution in stranding risk as a contraction in the supply of bond credit versus bank credit. Within the banking sector, big banks provide cheaper and more financing to fossil fuel firms, possibly giving rise to a novel “too-big-to-strand” concern for banking regulators.
Keywords: Environmental Policy; Climate Policy Risk; Loan Maturity; Carbon Bubble; Fossil Fuel Firms; Stranded Assets; Loan Pricing
JEL Codes: G2; Q3; Q50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| climate policy exposure (Q58) | bond yield spreads (G12) |
| climate policy exposure (Q58) | loan yield spreads (E43) |
| bond yield spreads (G12) | financing choices (shift to bank loans) (G21) |
| bank size (G21) | financing choices (underwriting loans) (G51) |
| climate policy exposure (Q58) | financing choices (bank loans) (G21) |
| large banks (G21) | financing choices (riskier fossil fuel projects) (G39) |