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13 J. Mgmt. & Sustainability 187 (2023)
Carbon Costs and Credit Risk in a Resource-Based Economy: Carbon Cost Impact on the Z-Score of Canadian TSX 260 Companies

handle is hein.journals/jms13 and id is 187 raw text is: Journal of Management and Sustainability; Vol. 13, No. 1; 2023 ISSN 1925-4725 E-ISSN 1925-4733 Published by Canadian Center of Science and Education Carbon Costs and Credit Risk in a Resource-Based Economy: Carbon Cost Impact on the Z-Score of Canadian TSX 260 Companies Adeboye Oyegunle', Olaf Weber' & Amr Elalfy2 1School of Environment, Enterprise and Development (SEED), Faculty of Environment, University of Waterloo, Canada 2Department of Management, College of Business and Economics, Qatar University, Qatar Correspondence: Adeboye Oyegunle, School of Environment, Enterprise and Development (SEED), University of Waterloo, 200 University Ave W, Waterloo, ON, N2L 3G1, Canada. Received: March 2, 2023 Accepted: April 20, 2023 Online Published: April 25, 2023 doi:10.5539/jms.v13n1p187 URL: https://doi.org/10.5539/jms.v13n1p187 Abstract Climate risks and climate risk-related policies on carbon threaten the ability of economies to thrive and will impact the credit risk of many sectors, primarily high-emitting sectors. Higher credit risks will also affect lenders if their credit portfolios are exposed to climate change risks. The introduction of carbon pricing policies will exacerbate this threat in resource-based economies such as Canada. While some research exists on climate exposure and risks to lending portfolios, there is a knowledge gap on how carbon pricing impacts individual commercial credit risk. Consequently, this study analyzes the effect of different carbon pricing scenarios on Altman's z-score. Using the Canadian TSX 260 data between 2010 and 2020 as a sample, this paper applied the costs of different carbon prices using the Canadian Government's carbon price regime of $0 to $170 to analyze Altman's z-score variables until 2030. The results suggest that carbon price will significantly impact the credit risk of companies in high-emitting industries, such as the energy sector. We conclude that climate policy exposure in the form of carbon costs will have a real impact on credit risk and that lenders must consider carbon emissions as part of their credit risk assessment. Keywords: climate risk, carbon pricing, climate risk policies, climate regulations, climate scenarios, climate risk impact, financial stability 1. Introduction The Intergovernmental Panel on Climate Change (IPCC) (IPCC 6th Assessment Report) reinforced that human-induced climate change is causing rapid and irreversible change to our planet (IPCC, 2021). Countries and supranational unions, such as the European Union, respond to this threat through market-based instruments such as carbon taxes (Stavins, 2022). By putting a price on and increasing the cost of carbon, governments aim to curtail Greenhouse Gas (GHG) emissions (Trinks, Mulder, & Scholtens, 2022). This paper analyzes how carbon price affect different economic sectors in a resource-based economy. With a specific focus on Canada but applicable to similar high carbon-dependent economies, we explored how the introduction of cost on carbon, such as carbon pricing, will impact carbon-intensive sectors that are significant contributors to the Gross Domestic Product (GDP) in such economies, and how this may expose the financial institutions that fund those sectors to increased costs and even bad debts. This is important as the full impact of regulatory climate transition risks, such as the introduction of carbon taxes on commercial credit risks, is not fully known, hence making it hard to predict how carbon control policies may play out in countries where essential sectors of the economy and substantial parts of the GDP comes from carbon-intensive sectors (Mukhtarov, 2022). For example, Canada's economy is strongly connected to carbon-intensive sectors such as mining and energy (Elder, 2021). These two sectors collectively contribute over 16% to the Canadian economy as of January 2023 (Statistics Canada, 2023). The percentage of carbon intensive secotor's contribution to the economy increases significantly when other sectors with significant carbon intensity, e.g., manufacturing and transportation, are added to the mix. Research has shown that there is a direct correlation between climate transition efforts like carbon pricing regulations and systemic risk (Li, Wang, & Liu, 2022), which may negatively affect the financial industry's 187

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