Carbon emissions and the cost of capital: Australian evidence

Yongqing Li · Ian Eddie · Jinghui Liu

109 citations0/0 files storedReview of Accounting and Finance

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Corporate Social Responsibility Reporting Corporate Finance and Governance Climate Change Policy and Economics

Abstract

Purpose – The purpose of this paper is to investigate the potential impact of the approved Australian carbon emissions reduction plan on the cost of capital and the association between companies’ carbon emission intensity and the cost of capital. Design/methodology/approach – A sample of Australian Stock Exchange 200 (ASX 200)-indexed companies from 2006 to 2010 is used. Hypotheses are tested based on Heckman’s two-stage approach. Three regression models are developed to examine the association between carbon emissions and the cost of capital. Findings – Using a sample of ASX 200-indexed listed companies, the paper finds that the cost of capital, including the cost of debt and the cost of equity, will increase for emissions-liable companies. Results also show that the cost of debt is positively correlated with a company’s emission intensity. However, little evidence supports that the emission intensity affects the cost of equity. Originality/value – As it is evident that the emissions reduction plan will adversely affect corporate entities’ cost of capital, this study suggests that companies, investors and lenders need to include carbon emission in risk analysis. An emissions-liable company should establish strategies to combat the impact of the Plan on rising cost that comes with the enforcement of the Plan. Government assistance is essential in the transitional period.

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References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1992The Cross-Section of Expected Stock Returns 1958The Cost of Capital, Corporation Finance and the Theory of Investment 1995Toward a New Conception of the Environment-Competitiveness Relationship 2008The cost of capital, corporation finance and the theory of investment 1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]

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