Carbon Liabilities Are Priced: Carbon-Adjusted Debt Predicts Underperformance

Thiago Gil and Wesley Mendes-da-Silva

RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), 2026, vol. 30(3), issue Vol. 30 No. 3 (2026): May/June - 2026, e250354

Abstract: Objective: this study investigates whether corporate carbon emissions behave as a financial liability that affects firms’ cost of capital and equity performance in Brazil. Theoretical approach: we propose a market-consistent metric that transforms reported greenhouse-gas emissions into a carbon-adjusted cost of debt (∆y) within a Merton-style structural credit model. This framework bridges sustainability accounting with asset pricing by treating emissions as an explicit, priced liability. Methods: using data from 58 firms in B3’s ICO2 index and daily observations from 2021 to 2025, we estimate ∆y for each company and run pooled regressions of BRL stock returns on global carbon-allowance ETF returns. We control for market returns, energy prices, and exchange-rate (FX) movements to capture the BRL-denominated impact of USD-priced carbon shocks. Results: the carbon-adjusted yield is close to zero for most firms but exhibits a heavy left tail, revealing a subset with material carbon-implied financing costs. Cross-sectionally, higher ∆y firms earn significantly lower daily stock returns. Moreover, the triple interaction carbon ETF × ∆y × FX is large and negative, indicating that BRL-denominated increases in carbon prices lead to stronger underperformance of high-∆y firms. Conclusions: markets partially internalize carbon obligations: higher carbon liabilities raise firms’ debt yields and reduce equity returns when global carbon prices rise in BRL terms. The carbon-adjusted yield offers a novel, yield-based indicator for investors, regulators, and policymakers to incorporate carbon risk into credit analysis, portfolio allocation, and corporate finance decisions.

Date: 2026
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