Carbon intensity and the cost of equity capital

Arjan Trinks*, Gbenga Ibikunle, MacHiel Mulder, Bert Scholtens

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

21 Citations (Scopus)


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.

Original languageEnglish
Pages (from-to)181-214
Number of pages34
JournalEnergy Journal
Issue number2
Publication statusPublished - 1 Mar 2022


  • Asset pricing
  • Carbon intensity
  • Cost of capital
  • Regulatory risk


Dive into the research topics of 'Carbon intensity and the cost of equity capital'. Together they form a unique fingerprint.

Cite this