There is growing evidence that firms with larger carbon footprints face higher borrowing costs. Ivanov et al. (2023) show that in the United States borrowing conditions, including interest rates, are more severe for brown firms following both the California cap-and-trade act and the Waxman–Markey act. Kacperczyk and Peydró (2024), using a global sample of firms, find that once banks commit to decarbonization, polluting firms receive less bank credit. Similar evidence is provided by Delis et al. (2024), Altavilla et al. (2023), Ehlers et al. (2022), and Reghezza et al. (2022). In bond markets, Zerbib (2019) and Baker et al. (2018), among others, document an additional return on brown relative to green corporate bonds. 

These findings suggest that credit markets are beginning to internalize both physical and transition risks. However, this evidence remains largely reduced-form and partial. It typically treats climate risk as a firmlevel characteristic, proxied by direct emissions, and focuses on its correlation with observed borrowing costs. Such an approach overlooks two key aspects. First, firms are embedded in complex input–output networks, where shocks originating in one sector propagate throughout the economy. Second, interest rates are not exogenously given risk premia, but equilibrium outcomes shaped by the interaction of production decisions, financing constraints, and default risk. 

The brief builds on a structural general equilibrium model with green and brown firms (Lavia an Luciano, 2026) to show that these network effects are central. In particular, it argues that environmental exposure should be measured through a Leontief-based aggregation that captures both direct and indirect (supplychain) emissions. This framework helps explain the behavior of U.S. banks around the Paris Agreement, highlighting how their credit conditions reflect not only firms’ own emissions but also their position within production networks. 

We conclude stressing that, from a policy perspective, these results imply that facilitating more favorable credit conditions for green firms, while accounting for the environmental characteristics of their entire value chain, is consistent with their lower risk exposure. Policies of this type would therefore not only be aligned with market-based risk pricing, but could also effectively support the transition toward a more sustainable economy.