Carbon Intensity and the Cost of Equity Capital

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