Paper Climate Capitalists

In theory, changes in the cost of capital can operate like a carbon tax and incentivize green investments. This channel requires that firms perceive the cost of green capital as lower than that of brown capital. Using hand-collected data, we show that green firms have indeed perceived their cost of capital to be 1 percentage point lower between 2016 and 2023, when climate concerns by financial investors and governments surged. Moreover, some energy firms have used a lower cost of capital for their green divisions. The findings suggest that the cost of capital can incentivize capital reallocation toward greener investments across firms and within firms.

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