The Price of Carbon Risk: Evidence from the Kyoto Protocol Ratification

79 Pages Posted: 4 Sep 2020

See all articles by Justin Hung Nguyen

Justin Hung Nguyen

Victoria University of Wellington

Cameron Truong

Monash University; Financial Research Network (FIRN)

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: September 3, 2020

Abstract

This paper examines the impact of carbon risk on firms’ financing costs. We exploit the Kyoto Protocol ratification (hereafter KPR) committed by the Australian government in December 2007 as an exogenous increase in carbon risk. We find that, in the post-KPR period, firms with high carbon emissions (carbon emitters) experience a substantial increase in the costs of debt and equity relative to those firms with a lower carbon footprint. We further identify higher cash flow risk and lower investor recognition as the two channels through which carbon risk affects the financing costs. Moreover, after the KPR, carbon emitters are less likely to be financed by major banks and more likely to borrow from new lenders. When conducting seasoned equity offerings, carbon emitters are more willing to use underwriting services rather than rights offerings. Our findings suggest that capital providers incorporate firms’ exposure to carbon risk into their decisions and charge them a corresponding risk premium.

Keywords: carbon risk; cost of debt; cost of equity; cash flow risk; investor recognition

JEL Classification: G32, Q51, Q58

Suggested Citation

Nguyen, Justin Hung and Truong, Cameron and Zhang, Bohui, The Price of Carbon Risk: Evidence from the Kyoto Protocol Ratification (September 3, 2020). Available at SSRN: https://ssrn.com/abstract=3669660 or http://dx.doi.org/10.2139/ssrn.3669660

Justin Hung Nguyen

Victoria University of Wellington ( email )

23 Lambton Quay
Pipitea
Wellington, 6011
New Zealand

Cameron Truong

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Bohui Zhang (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

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