Title: The euro area carbon bond premium

Authors: Marleen de Jonge (RCSII), Dirk Broeders, David Rijsbergen

Journal: The European Journal of Finance

This paper investigates whether companies with higher carbon emissions face higher borrowing costs in the euro area corporate bond market. Using data on firms’ carbon emissions – including direct emissions (Scope 1), emissions from purchased energy (Scope 2), and emissions across their supply chains (Scope 3) – the analysis shows that investors demand a “carbon premium” to compensate for climate-related risks. On average, a one standard deviation increase in Scope 1 and 2 emissions is associated with a 26 basis point increase in a firm’s bond yield. This premium is robust across different samples and emission measurement methods. It reflects both concerns about financial risks tied to the climate transition and a growing investor preference to avoid carbon-intensive assets – especially from 2020 onward, when preference-driven pricing increased sharply. Firms receiving free emission allowances under the EU Emissions Trading System tend to face significantly lower premiums, suggesting that carbon pricing policies can help reduce financing costs. The premium rises with bond maturity, indicating that investors anticipate climate regulation will remain in place over the long term.

Link to the paper

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