Counting the carbon burden: Evidence from municipal bonds in China

This paper examines how carbon emissions affect municipal corporate bond (MCB) pricing in China. Using data from 2008–2022, we find that higher emissions lead to wider credit spreads. To address endogeneity, we use a difference-in-differences strategy and an instrumental variable approach, both confirming the results. Mechanism analysis shows that carbon emissions widen credit spreads by weakening implicit guarantees, reducing repayment capacity, and lowering investor demand. The effect is stronger in developed cities, those with limited refinancing capacity, lower marketization, lower fiscal transparency, and after 2020. These findings highlight the financial implications of environmental risk in municipal bond markets.