Transition risks related to climate change are increasingly recognised in equity and bond markets. This column uses syndicated loan tranches issued to US firms to study how carbon risk is priced. It finds robust evidence that firms with higher carbon intensity face higher loan spreads. However, this carbon premium has declined and effectively disappeared in recent years, though it increases during periods of monetary tightening. Borrowers that signal environmental commitment pay lower loan risk spreads and undertake higher capital and R&D expenditure, but the discount shrinks as carbon intensity rises.
Loan risk spreads – the premium above risk-free rates – directly shape firms’ financing costs and investment decisions. Although much research in the literature has studied their determinants, the impact of corporate carbon emissions and environmental commitments on these spreads has received much less attention, even as transition risks are increasingly recognised in equity and bond markets (e.g. Bolton and Kacperczyk 2021a, 2021b, Atilgan et al. 2024, Seltzer et al. 2025). Studies have confirmed a carbon premium in loan pricing for Europe and some other markets (e.g. Altavilla et al. 2023, Ehlers et al. 2022). Yet, evidence on a carbon premium in US bank lending remains scarce, especially evidence regarding how both borrower and lender environmental commitments influence credit terms and real economic outcomes such as investment and innovation. We address these gaps in the literature in our recent study (Dong et al. 2025).
Carbon risk is priced – and it matters but less than before
We analyse syndicated loan tranches issued to more than 2,700 US firms from 2010 to 2023, matched with firm-level carbon emissions and environmental commitments. We find robust evidence of a carbon premium: firms with higher carbon intensity – measured as scope 1 and 2 carbon emissions per dollar of revenue – face higher loan spreads.
The estimated carbon premium is economically significant and consistent with evidence from European and global lending markets (Altavilla et al. 2023, Ehlers et al. 2022). Specifically, high-emission borrowers (at the 90th percentile of carbon intensity) incur a premium of one to five basis points, closely mirroring the credit risk premium, which is around three basis points for firms at the 90th percentile of default probabilities. This result shows that lenders treat carbon risk as a material factor in credit decisions – comparable to conventional factors determining default risk.
Overall, these findings suggest that US lenders do internalise carbon risk in their pricing decisions. Moreover, we find that the carbon premium has declined and effectively disappeared in recent years. Rolling-window regressions show that the carbon premium rose steadily until 2019 but has since declined and turned statistically insignificant in the most recent period up to 2023.
Figure 1 Time-varying carbon premium
Note: This figure plots the estimated coefficients on borrower carbon intensity (i.e., the carbon premium) from six-year rolling window regressions. The first dot covers the period from 2010 to 2015, with each subsequent dot moving forward by one year. Each marker represents the estimated coefficient, with vertical lines denoting 95% confidence intervals. Circle markers indicate statistical significance at the 5% level, square markers at the 10% level, and triangle markers indicate estimates that are not statistically significant.
This decline may reflect the broad policy support in the aftermath of the COVID pandemic, including through expansionary monetary policy, which narrowed risk spreads across many borrowing vehicles. Provisions in the Inflation Reduction Act likely further contributed to this decline by facilitating some investments in low-emission technologies. However, this result would need to be confirmed through future research, particularly with a longer post-COVID period. In addition to its evolution over time, we also find that the pricing of this risk varies significantly depending on the respective environmental commitments of borrowers and lenders.
Commitments mitigate the carbon premium – but not for everyone
Borrowers that signal environmental commitment – by setting emission-reduction targets, disclosing emissions, or borrowing through green or sustainability-linked loans – pay lower loan risk spreads. For example, carbon-intensive firms with an emission-reduction target pay 19 basis points less than those without. However, this discount decreases as carbon intensity rises, suggesting lenders find commitments from lower-emission borrowers more credible.
Figure 2 Target and carbon premium
Note: This figure plots the marginal effect of an emission reduction target on loan spreads across different levels of borrower carbon intensity, evaluated for firms that had disclosed such targets at the time of loan origination.
Lender commitments also matter. Financial institutions that have pledged to decarbonise their portfolios under the Science Based Targets initiative charge higher spreads to carbon-intensive borrowers. These lenders appear to adopt a stricter pricing discipline, which highlights the influence of carbon-related commitments on credit allocation decisions.
From commitments to action – investment, innovation, and liquidity
Beyond loan pricing, carbon commitments impact real economic outcomes. We find that borrowers with such commitments undertake higher capital and R&D expenditure, suggesting investments in lower-carbon technologies, but this effect diminishes as carbon intensity rises, echoing our results on loan pricing. For example, high emitters adopting an emission-reduction target raise capital spending by 6%. When we also factor in lender commitments, we find that lenders committed under the Science Based Targets initiative support investment among low-emission firms but tighten credit conditions for high emitters, reducing their investment. This underscores the varying influence of different lenders on the transition.
The liquidity channel offers another lens into firm behaviour through corporate financial decisions. Committed borrowers hold less cash because lower loan risk spreads likely reduce the need for precautionary buffers.
Monetary policy amplifies carbon risk pricing
We also examine how macroeconomic conditions affect carbon risk pricing. During periods of monetary tightening, the carbon premium increases – consistent with the risk-taking channel of monetary policy and evidence from European loan markets (Altavilla et al. 2023). However, borrower commitments can mitigate this effect, especially for low-emission firms. As monetary policy tightens, carbon-intensive firms face higher borrowing costs.
Source : VOXeu
