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How does the carbon emission trading scheme affect enterprise cost of equity capital? Evidence from China

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  • Yuchi, Xiaojuan
  • Liu, Longshan

Abstract

China’s carbon emission trading scheme (CETS) connects corporate carbon emissions behaviors with tradable quota constraints, altering the relationship between carbon risks and financing costs. We systematically examine the impact of China’s CETS on the cost of equity capital (COE) as a market-oriented approach to changing corporate carbon risk. The findings reveal that the CETS significantly improves enterprises’ COE in regions where CETS is implemented. Mechanism analysis shows that the CETS increases COE by raising enterprises’ financing constraints and financial distress risk. Robust tests show that the CETS still has a robust effect on improving the COE. The positive impact is more significant for state-owned enterprises, labor-intensive enterprises, and enterprises located in the eastern and western regions. Our research expands the analysis of the relationships between carbon risk, carbon trading, and equity financing costs, and the results provide a basis for optimizing market-oriented environmental protection policies and a reference for investors.

Suggested Citation

  • Yuchi, Xiaojuan & Liu, Longshan, 2026. "How does the carbon emission trading scheme affect enterprise cost of equity capital? Evidence from China," Finance Research Letters, Elsevier, vol. 106(C).
    • Handle: RePEc:eee:finlet:v:106:y:2026:i:c:s1544612326008494
    DOI: 10.1016/j.frl.2026.110321
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