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Carbon emissions and the cost of capital: Australian evidence

Yongqing Li (School of Accounting and Finance, Kean University, Union, New Jersey, USA)
Ian Eddie (Business School, Southern Cross University, Tweed Heads, Australia)
Jinghui Liu (Business School, Southern Cross University, Bilinga, Australia)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 4 November 2014




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.


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.


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.


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.



The authors thank the CRC for Rail Innovation Australia and Southern Cross University for research and financial support. We would also like to acknowledge the helpful comments from Luciana Lew, Michael Charles, Sufia Chung, Zia Haqq and Shanshan Li, from participants at the 15th International Business Research Conference, and from workshop participants in seminars and Doctorial Symposiums at Southern Cross University. The authors appreciate the comments from six anonymous reviewers.


Li, Y., Eddie, I. and Liu, J. (2014), "Carbon emissions and the cost of capital: Australian evidence", Review of Accounting and Finance, Vol. 13 No. 4, pp. 400-420.



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Copyright © 2014, Emerald Group Publishing Limited

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