How climate policy uncertainty affects corporate debt default risks

This study investigates how climate policy uncertainty (CPU) influences corporate debt default risk, using firm-level data from 4,610 A-share listed companies in China from 2009 to 2023. Leveraging a novel province-level CPU index, we find that heightened CPU significantly reduces firms’ distance to default, particularly among large firms, high-carbon emitters, and those with low ESG performance. Mechanism analysis shows that CPU increases default risk by raising financing costs and asset impairment losses. We further identify environmental investment and green innovation as effective mitigation channels, especially for carbon-intensive firms. By introducing a high-resolution policy uncertainty data, our findings provide new evidence on how local climate policy ambiguity affects financial fragility and offer practical implications for promoting green resilience and policy transparency in the transition to a low-carbon economy.