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Carbon Intensity and the Cost of Equity Capital

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  • Arjan Trinks, Gbenga Ibikunle, Machiel Mulder, and Bert Scholtens

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.

Suggested Citation

  • Arjan Trinks, Gbenga Ibikunle, Machiel Mulder, and Bert Scholtens, 2022. "Carbon Intensity and the Cost of Equity Capital," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    • Handle: RePEc:aen:journl:ej43-2-mulder
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    Cited by:

    1. Wu, Zhenshu, 2023. "Essays in corporate finance and ESG," Other publications TiSEM fe6f9604-d0c5-46f3-9492-f, Tilburg University, School of Economics and Management.
    2. Trinks, Arjan & Mulder, Machiel & Scholtens, Bert, 2022. "External carbon costs and internal carbon pricing," Renewable and Sustainable Energy Reviews, Elsevier, vol. 168(C).
    3. Trinks, Arjan & Hille, Erik, 2023. "Carbon Costs and Industrial Firm Performance: Evidence from International Microdata," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277705, Verein für Socialpolitik / German Economic Association.
    4. Arjan Trinks & Erik Hille, 2023. "Carbon costs and industrial firm performance: Evidence from international microdata," CPB Discussion Paper 445, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Atiqa Rehman & Halit Gonenc & Niels Hermes, 2023. "Carbon disclosure policy, external financing needs and the cost of capital: Does financial market quality matter?," Business Strategy and the Environment, Wiley Blackwell, vol. 32(8), pages 5854-5872, December.

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    JEL classification:

    • F0 - International Economics - - General

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