Carbon Intensity and the Cost of Equity Capital

Arjan Trinks, Gbenga Ibikunle, Machiel Mulder and Bert Scholtens

The Energy Journal, 2022, vol. 43, issue 2, 181-214

Abstract: The transition from high- to lower-carbon production systems increasingly creates regulatory and market risks for high-emitting firms. We test to what extent equity market investors demand a premium to compensate for such risks and thus might raise firms’ cost of equity capital (CoE). Using data for 1,897 firms spanning 50 countries over the years 2008-2016, we find a distinct and robust positive impact of carbon intensity (carbon emissions per unit of output) on CoE: On average, a standard deviation higher (sector-adjusted) carbon intensity is associated with a CoE premium of 6 (9) basis points or 1.7% (2.6%). This effect is primarily explained by systematic risk factors: high-emitting assets are significantly more sensitive to economy-wide fluctuations than low-emitting ones. The CoE impact of carbon intensity is more pronounced in high-emitting sectors, EU countries, and firms subject to carbon pricing regulation. Our results suggest that carbon emission reduction might serve as a valuable risk mitigation strategy.

Keywords: Carbon intensity; cost of capital; regulatory risk; asset pricing (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Journal Article: Carbon Intensity and the Cost of Equity Capital (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:sae:enejou:v:43:y:2022:i:2:p:181-214

DOI: 10.5547/01956574.43.2.atri

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