How Does Carbon Price Affect Green Investment and Credit Risk:A Trade-off Analysis Based on Expected Return and Default Cost
Since carbon price is a significant signal to incentivize firms'emission reduction and green investment with the establishment of a national carbon market in China,the policies of green investment and risk management of firms under the"dual carbon"goal are affected by the expected carbon price changes.Therefore,this paper proposes a two-stage theoretical model with the carbon price to quantitatively study the mechanism of the impact of carbon price on optimal green investment and the credit spread of green bonds.The entrepreneurs face the trade-off between the opportunity cost of underinvestment and the default cost of green debt not being repaid.Under this trade-off,the optimal investment and cash holdings of firms are endogenously determined by factors that affect the credit risk of firms,including carbon prices.The pledgeability of carbon assets makes carbon prices directly affect the firm default boundary and indirectly affect the default boundary through affecting the scale of green investment.Therefore,the model in this paper can study how the green investment policy,credit risk,and green bond prices will change correspondingly as the carbon price changes.The proposed model shows that the optimal investment decision of firms is an equilibrium result under the trade-off.The increase in the carbon price can indeed reduce the credit spread of green bonds.Intuitively,the higher carbon price makes the scale of green investment larger.However,the model leads to a different conclusion that the increase in the carbon price reduces the optimal green investment when the carbon price is significantly higher than the shadow carbon price.This paper finds one of the essential factors leading to the conclusion is that the direct impact of the carbon price on credit risks is greater than the indirect impact due to the asymmetric impacts of carbon price on the probability and cost of default.Moreover,the discussion on the shadow carbon price shows that firms should strive to develop green technologies in green investment to improve carbon emission reduction capacity per unit of output value and reduce the marginal carbon emission reduction.The empirical results verify the prediction of the theoretical model.The paper collates and selects relevant data on 820 green bonds issued by 422 firms in China from January 2016 to June 2022.Further empirical analysis implies that firm optimal green investment policies are characterized by a double threshold of carbon prices.When the carbon price is lower than its shadow price,the increase in the carbon price enhances the optimal green investment scale.Contrary to the intuition,when the carbon price is at a high level,the carbon price reduces optimal green investments.Furthermore,when the carbon price is at lower or higher levels,the green bond credit spreads increase and decrease correspondingly as the scale of green investment decreases.This paper contributes to a deeper understanding of the role and micro-mechanism of carbon prices on the optimal green investment policy of firms and the pricing of green bonds.
green investmentcarbon pricecredit spreadshadow pricegreen bond
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