It Costs to Emit Carbon: Interest Rates on European Corporate Debt Increase Based on Carbon Emissions

Last week, the Dutch central bank released a study that concluded that “[s]ince 2020, a clear price difference has emerged between the costs of borrowing for companies with relatively high carbon emissions and those with lower (or no) carbon emissions . . . . [t]he difference has [] widened to over 40 basis points (0.4%).”  The implication of this divergence is clear: “companies with lower emissions can finance their operations at lower costs.”  The Dutch central bank suggested that this development was attributable to “the implementation of stricter European climate policies,” including “the European Green Deal in December 2019, [and] new climate legislation in 2020.”  In essence, the research study suggested that the market was beginning to internalize the legislative and regulatory agenda of transitioning to a green economy by assigning a risk premium to carbon-intensive activities.  In short, this was a (partial) victory for those interested in combatting climate change through influencing the behavior of market participants through government action creating meaningful (dis)incentives. 

Of course, this development in Europe--that companies pursuing carbon-intensive activities must pay higher interest rates on the market--is anathema to many conservatives, and indeed there have been a number of initiatives from conservative states seeking to penalize financial institutions that effectively assign a higher risk profile to carbon-intensive activities.  (Whether such efforts survive legal challenge is a separate question entirely.)  In any event, this study lends credence to the position that changes in climate policy can lead to the internalization of climate risk by the marketplace.