Abstract
We examine the link between carbon intensity and US corporate bond spreads in a sample of disclosing companies before and after 2020. We find a consistent discount among high-intensity companies of approximately 11 bps prior to 2020 compared to companies with median carbon intensity. From 2020 to 2022, the discount increases to 16 basis points for A-rated bonds, while it turns insignificant for BBB-rated bonds. For A-rated bonds, we find an increasing term structure in the carbon discount. Our results imply a discrepancy between the carbon risk perception of bond market investors and credit rating agencies and a potential underpricing of climate risk. Our study contributes to the understanding of transition risks in industrial decarbonization by examining whether carbon intensity is priced in corporate bond markets, a key channel for financing industrial activities. From a regulatory and macroeconomic standpoint, our findings underscore the challenges of pricing climate-related transition risk in corporate credit markets amid shifting US climate policy and largely voluntary, heterogeneous carbon disclosure. Our results suggest that bond investors do not uniformly penalize carbon-intensive firms, instead rewarding firms maintaining strong credit quality despite high carbon intensity. Taken together, our findings reveal divergent carbon-related credit risk assessments across market participants.