Do carbon emissions affect the cost of capital? Primary versus secondary corporate bond markets

Daniel Kim and Sébastien Pouget

No 23-1472, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We empirically study whether carbon emissions affect US firms’ cost of capital. We show that firms with higher carbon emissions tend to face higher cost of capital on the primary market. However, this carbon premium represents less than 15% of the one prevailing on the secondary market. A simple model attributes this gap to uncertainty about future climate preferences of investors and limited competition among primary market dealers. We find evidence for these two channels. Our findings imply that market imperfections reduce the effectiveness of the cost of capital channel in inducing firms to reduce their carbon emissions.

Keywords: Climatefinance; Carbonpremium; Bondmarkets; Greeninvestors; Underwriting dealers (search for similar items in EconPapers)
JEL-codes: G12 G41 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-cfn, nep-ene, nep-env and nep-ger
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:128527

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