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

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  • Kim, Daniel
  • Pouget, Sébastien

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.

Suggested Citation

  • Kim, Daniel & Pouget, Sébastien, 2023. "Do carbon emissions affect the cost of capital? Primary versus secondary corporate bond markets," TSE Working Papers 23-1472, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:128527
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    More about this item

    Keywords

    Climatefinance; Carbonpremium; Bondmarkets; Greeninvestors; Underwriting dealers;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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