Do carbon emissions affect the cost of capital? Primary versus secondary corporate bond markets

We study whether carbon emissions affect firms' cost of capital by focusing on US corporate bond markets from 2005 to 2022. We show that firms with high carbon emissions have larger yields than firms with low emissions on the primary market, implying a higher cost of capital. However, this carbon premium represents less than 15\% of the one prevailing on the secondary market. Based on a simple model, we attribute this gap to uncertainty about future climate preferences of investors and limited competition among primary market dealers. We find empirical evidence for these two channels. Our findings imply that primary market imperfections reduce the effectiveness of the cost of capital channel that could induce firms to reduce their carbon emissions