INTERNATIONAL MONETARY FUNDCredit Risk Where It'sDue:Carbon Pricing andFirm DefaultsStefan Loschenbrand,Martin Maier,Laurent Millischer,andFlorian ReschWPI25/62●IMF Staff Discussion Notes(SDNs)showcasepolicy-related analysis and research beingdeveloped by IMF staff members and arepublished to elicit comments and toWORKING PAPERencourage debate.The views expressed inStaff Discussion Notes are those of the author(s)and do not necessarily represent the views of theIMF,its Executive Board,or IMF management.2025★MAR2025 International Monetary FundWP25/62IMF Working PaperInstitute for Capacity DevelopmentCredit Risk Where It's Due:Carbon Pricing and Firm DefaultsPrepared by Stefan Loschenbrand,Martin Maier,Laurent Millischer,and Florian ReschAuthorized for distribution by Selim ElekdagMarch 2025IMF Working Papers describe research in progress by the author(s)and are published to elicitcomments and to encourage debate.The views expressed in IMF Working Papers are those of theauthor(s)and do not necessarily represent the views of the IMF,its Executive Board,or IMF management.ABSTRACT:This study investigates carbon pricing-induced credit risk,the potential negative impact of carbonpricing on firms'ability to meet their financial obligations.Applying a well-established credit assessment modelto a novel data set combining financial statements and emissions data,we subject the over 2.5 million borrowersof the euro area's largest banking groups to two carbon pricing stress scenarios.Our findings reveal a notablevariation in impacts between and within sectors.However,even under the conservative scenario,many firmsexperience only a minimal increase in their probabilities of default.In the more realistic scenario,the aggregateimpact on firms'creditworthiness is not material.The analysis further suggests that the capitalization ofeuro area banks would not be significantly affected by the carbon pricing-induced increase in corporate creditrisk.While this study does not consider the macroeconomic transmission channels,it indicates that highercarbon prices are not likely to trigger widespread firm defaults and jeopardize financial stability.RECOMMENDED CITATION:Loschenbrand,S.,Maier,M.,Millischer,L.and Resch,F.(2025).Credit RiskWhere It's Due:Carbon Pricing and Firm Defaults /MF Working Paper WP/25/62.JEL Classification Numbers:G32.Q54,Q58Keywords:Credit Risk,Climate Change,Transition Risk,Carbon PricingAuthor's email addresses:stefan.loeschenbrand@oenb.at,martin.maier@oenb.at,