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Do corporate carbon emissions affect risk and capital costs?

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  • Arian, Adam G.
  • Sands, John
Abstract
This study explores the impact of corporate carbon emissions on idiosyncratic risk and capital costs. Leveraging a dataset comprising 1016 company-year observations from Australian-listed companies over the period 2007 to 2020, our panel regression analysis reveals significant associations. We find that companies with higher carbon emissions experience elevated idiosyncratic risk, contributing to increased capital costs in both debt and equity markets. Our results remain robust after using alternative model specifications, accounting for the diverse nature of corporate carbon performance among industries, shaped by unique industrial factors. These results highlight the significance of carbon emissions pricing within financial markets and emphasize the importance of standardized corporate carbon disclosure in enhancing market efficiency, facilitating more accurate valuation, and guiding resource allocation in the broader economy.

Suggested Citation

  • Arian, Adam G. & Sands, John, 2024. "Do corporate carbon emissions affect risk and capital costs?," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1363-1377.
    • Handle: RePEc:eee:reveco:v:93:y:2024:i:pa:p:1363-1377
    DOI: 10.1016/j.iref.2024.04.018
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    More about this item

    Keywords

    Corporate carbon emissions; Corporate risk; Emissions intensity; Cost of capital (COC); Market efficiency;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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