The Indonesian government is committed to achieving carbon neutrality (net zero emission) by 2060 (menlhk.go.id). As part of this effort, the government issued Financial Services Authority Regulation No. 51/POJK.03/2017 which requires companies to prepare sustainability reports, including reporting related to carbon emissions management. According to Zhou et al. (2024), climate and environmental policies implemented by the government are designed to influence the scale, speed and character of the transformation towards renewable energy. Pressure from the government and other institutions is expected to encourage companies to be more serious in managing carbon emissions to avoid potential litigation for environmental damage caused by carbon emissions. This will ultimately increase the carbon risk exposure of companies that do not comply with government carbon policies.

Carbon risk refers to the impact of carbon on business caused by the transition to a low-carbon economy (Rao et al., 2023) . Investors perceive that carbon risk may result in decreased company performance (Krueger et al., )2020 such as lower firm value (Bolton et al., 2022) , wider yield spreads (Seltzer et al., 2022) , increased risk of financial distress (Damert et al., 2017) , as well as more likely to default (Capasso et al., 2020) . Therefore, carbon emissions become a risk for companies due to the perception of stakeholders, including investors, who weigh environmental damage and the possibility of reduced company performance caused by the costs incurred to comply with government carbon regulations (Shu et al., )2023 . Dijk et al. (2021) ) suggest four types of carbon risk proxies, namely absolute levels or volumes of carbon emissions, carbon intensity (emissions measured by financial metrics such as revenue or assets), climate change-related events, and carbon emissions disclosure scores or ratings.

Companies with a poor environmental profile including high carbon risk are more vulnerable to changes in environmental regulations and obligations (Zhang and Fang, 2022) . Creditors as one of the investors providing loans view vulnerability to regulatory risk as increasing the uncertainty of business conditions and increasing the risk of corporate financial distress. For creditors, this risk increases loan risk because it has the potential to cause default. Creditors demand greater compensation from the funds lent, so creditors set higher loan interest rates on companies with high carbon risk. (Jung et al., 2016; Kleimeier and Viehs., 2016; Maaloul, 2018; Palea and Drogo,

2020; Pizzutilo et al., 2020; Al Rabab'a et al., 2023). A lot of empirical evidence shows

that high carbon risk leads to increased debt costs, thus reducing the efficiency of borrowed capital. This condition is utilized by the government to encourage lenders to develop environmentally friendly loans (greenbonds). Companies that are able to manage carbon emissions are subject to lower debt costs, as they are seen as companies that support government interests and are considered less risky by creditors.

Endarto et al. 2022 stated that Indonesia's greenbonds instruments showed

growth in terms of amount, which was valued at USD 1.27 billion in 2018 and increased to USD 2.75 billion in 2020. However, the results of the Asian Development Bank's 2022 survey show that the development of green finance in Indonesia is still very low. The survey found that only 5% of institutional investors hold more than 30% of greenbonds in their investment portfolio, due to a lack of environmental awareness and a lack of creditor resources to develop green bonds (Asian Development Bank, 2022) . Both studies indicate the development of green credit in Indonesia.

However, these efforts do not seem to have reached an urgent level to realize the Indonesian government's efforts to achieve net zero carbon emissions by 2060. This is evident from the volume of Indonesia's carbon emissions, which continues to increase from 535.72 tonsCO2e (Carbon Dioxide Equivalent) in 2017, to 674.54 MtonsCO2e in 2023 ( Crippa et al., 2024). Based on this condition, an in-depth study is needed to determine the behavior of financial institutions related to the effectiveness of the government's carbon policy that seeks to realize a low-carbon economy through the greenbonds mechanism. The study is needed so that the government and companies have a strong basis for developing strategies to reduce carbon emissions to ensure environmental sustainability. However, in Indonesia, there is no study that specifically examines carbon risk and its impact on the cost of debt using proxies for the volume and intensity of carbon emissions that are considered in line with the government's interest in reducing carbon emissions.

Nasih et al. (2024) examined the impact of carbon emission disclosure scores as a

proxy for carbon risk on the cost of debt of companies participating in PROPER (corporate performance rating assessment program in environmental management) from 2015 to 2018. This study found that higher carbon emission disclosure scores can reduce information asymmetry between companies, creditors, and public expectations, thereby reducing debt costs. The carbon emission management report is the basis for the government to obtain information on the company's carbon emission management. Disclosure of carbon emission management is one of the mandates in POJK Number. 51/POJK.03/2017. However, carbon disclosure scores, environmental, social, and governance (ESG) disclosure scores do not fully capture companies' efforts

to reduce carbon footprints (Stanny, 2008 Safiullah et al., 2022). Therefore, this study

seeks to use two measures of carbon risk that are considered more aligned with government interests, namely the volume and intensity of carbon emissions

This study aims to analyze the impact of the government's interest in realizing a low-carbon economy on the cost of corporate debt. The cost of debt reflects creditor interests that can be influenced by carbon risk, where high carbon risk leads to higher debt costs. This condition is expected to encourage companies to reduce emissions to obtain low risk perception from creditors, so that they can get loans at a lower cost. Carbon risk is proxied by the volume and intensity of carbon emissions. This study fills the gap in empirical evidence related to the impact of carbon emissions on the cost of debt of non-financial companies in Indonesia. The results are expected to help companies strategize on appropriate carbon performance and become a consideration for the government in formulating effective greenbonds policies.

This study examines the impact of carbon risk on the cost of debt of 255 public companies in the non-financial sector in Indonesia from 2017 to 2023. This study found that in general, carbon risk has not been considered by creditors in the decision of the cost of corporate debt, so the government must work harder to encourage financial institutions to issue environmentally friendly credit instruments. This is so that through green credit instruments the government can encourage companies to reduce carbon emissions to obtain debt funding from greenbonds at a low cost of debt. Companies must also proactively anticipate implementing strategies to reduce carbon emissions to balance value creation for creditors and value creation for the government as the company's main stakeholder in order to gain a competitive advantage, thus ensuring the sustainability of the company. The remainder of this paper is organized as follows. The second section describes the literature review, data and research methodology, while the third section reports and discusses the empirical findings. The last section contains conclusions, limitations and research suggestions.

According to Freeman's (1984) stakeholder theory, companies can achieve long- term sustainability if they are able to implement proactive and anticipatory strategies to environmental changes. Companies must demonstrate commitment in creating and maintaining value for key stakeholders such as shareholders, employees, customers, suppliers, communities, creditors, and governments. This strategy gives the company a competitive advantage and increases the chances of business sustainability. Donaldson and Preston (1995) added that good relationship management with key stakeholders can improve the reputation and economic success of the company. Stakeholder theory helps manage conflicts of interest in the formation of corporate environmental policies, so that they are in line with the demands of various parties (Freeman, 1984). Kabir et al. (2021) state that responding to stakeholder concerns for the environment, such as reducing carbon emissions, can increase company value and performance. Lieu et al. (2024) found that good climate governance reduces carbon emissions in energy companies in 91 countries. The global commitment to reducing carbon emissions also continues to strengthen (Zang et al., 2025).

Wang (2023) showed that green financial policies, such as green credit guidelines, can limit financing for high-polluting firms and promote environmental protection. Liu et al. (2019) add that environmental ratings from the government make it easier for green companies to obtain long-term loans at lower costs. This emphasizes the importance of the government's role as a key stakeholder in encouraging sustainable financing practices.

Sundaran and Hansen (2023) also emphasize that the government expects companies to actively reduce carbon emissions as part of climate change mitigation efforts, which in turn supports corporate and environmental sustainability.

The government encourages financial institutions to develop green financing

such as greenbonds, and lenders are expected to consider a company's carbon performance when providing loans. Shu et al. (2022) explain that companies with high carbon risk face additional costs to comply with carbon regulations, which can reduce profits and the ability to repay debt. Cumming (2023) and Kabir (2021) state that companies that reduce carbon emissions can gain a competitive advantage through increased access to financing at a lower cost. Nguyen (2020) adds that socially responsible investors tend to avoid companies with high carbon intensity, thus increasing their cost of capital. Empirical evidence shows that creditors take carbon policy risk into account in debt pricing, making carbon emissions an important risk factor in corporate financing.

The cost of debt reflects the return that creditors expect considering default risk, interest rates, and tax protection benefits, and is part of the firm's cost of capital (Fama and French, 2002). Companies with poor environmental performance are more vulnerable to environmental regulations and liabilities (Zang and Fang, 2022). Carbon regulations may limit access to finance as creditors assign higher debt costs to firms with high carbon risk (Shu et al., 2022). Creditors perceive high-emission projects as more financially risky because regulatory compliance entails additional costs. Carbon

policies also cause financial markets to devalue high-emitting companies, increasing the cost of capital (Bolton et al., 2022). This risk is ultimately passed on to borrowers through increased debt costs (Palea and Drogo, 2020; Pizzutilo et al., 2020; Goss and Roberts, 2011).

Creditors view carbon-intensive projects as risky because the externalization of carbon pollution impacts climate change to the detriment of society at large (Maaloul, 2018, Pizzutilo et al., 2020). Creditors also face exposure to corporate carbon risk as they bear the costs of borrower default, and still face reputational risk of lending capital to environmental polluters (Jung et al., 2016). Bolton et al. (2022) explain that investors are risk-averse, so investors actively seek ways to reduce their exposure to climate-related risks and demand compensation appropriate to the risk received and engage to minimize risks. The carbon premium appears in higher returns as compensation for higher exposure to carbon risks.

Research aimed at examining the impact of carbon emissions on the cost of debt, for example, Palea and Drogo (2020) found that companies with a higher carbon emissions ratio have a higher cost of debt and the relationship between carbon emissions and the cost of debt became clearer after the implementation of the Paris Agreement in 2015. Jung et al. (2018) show that companies in Australia experience an increase in the cost of debt at high scope 1 carbon emissions. Companies that do not voluntarily declare their emissions are classified as high emitters. While other studies provide different conclusions. For example, Zhou et al. (2018) found a non-linear relationship (u-shape) between emissions and corporate debt costs in China in 2011- 2015. The non-linear relationship is influenced by the role of the media as a proxy for corporate reputation. Interestingly, Ding et al. (2023) found that carbon emissions do not affect the cost of acquiring debt for non-financial companies in China, but reduce the amount of bank loans. Kleimeier and Viehs (2016) and Maaloul (2018) found that the volume of carbon emissions is positively related to the cost of corporate debt.

Kleimeier and Viehs (2016) find that Scope 1 carbon emissions increase yield spreads on loans, especially in high-emission industries, as lenders start to consider environmental performance in credit scoring. Maaloul (2018) showed that in Canada, each additional ton of greenhouse gas emissions increases the cost of debt by 11-15%. Pizzutilo et al. (2020) found that a 100 basis point reduction in the carbon intensity of large companies in the STOXX Europe 600 index lowers the total cost of debt by 16 points. Palea and Drogo (2020) confirmed that lenders charged higher risk premiums to companies with high emissions, even in the most polluting sectors before the Paris Agreement. Koutoupis et al. (2023) show that external guarantees of greenhouse gas emissions and gender diversity significantly reduce the cost of debt of international companies from 2015 to 2021 and argue that greenhouse gas guarantees reduce

information asymmetry and signal a long-term commitment to excellence. Meanwhile, companies in Asia-Pacific countries that have better carbon performance tend to have lower debt costs (Al Rabab'a et al., 2023).

The volume of carbon emissions is a measure used in carbon tax and trading policies and is therefore important to report. However, in 2020 only 37% of non- financial companies in Indonesia disclosed carbon emission volumes. The volume of carbon emissions is also a benchmark for the realization of a low-carbon economy, because a low-carbon economy can only be realized if the volume of carbon emissions can be reduced to the level expected by the government and world institutions such as (United Nations Framework Convention on Climate Change = UNFCC). On the other hand, the Indonesian government has set a commitment in the Nationally Determined Contribution (NDC) to achieve net zero emission by 2060 (menlhk.go.id

). The target is clearly measured by the volume of carbon emissions, so the volume of carbon emissions is a company risk and a study is needed on how the volume of carbon emissions impacts the company's financial performance.

The previous explanation shows that the volume of carbon emissions is a measure that aligns with the Indonesian government's target of realizing a low-carbon economy. We argue that the volume of carbon emissions can be used to analyze a company's carbon emission reduction efforts by testing for firm-time fixed effects. In this case, companies that implement carbon emission reduction policies over time are aligned with the government's interest in reducing carbon emissions, so it should be a concern for creditors in determining the cost of corporate debt.

The descriptions and research results that have been described indicate that creditors include information on the volume of corporate carbon emissions as a loan risk. Creditors anticipate the possibility of default of borrowing companies by increasing loan conditions by charging high debt costs for companies with high carbon emission volume levels, so the first hypothesis formulation of this study is stated as follows.

H1: The volume of carbon emissions has a positive effect on increasing the cost of corporate debt.

The volume of carbon emissions is a measure that is in line with the government's interest in reducing the volume of carbon emissions. However, companies' carbon releases tend to be proportional to production levels, making it difficult to compare carbon performance across companies (Hoffmann and Busch, 2008). Companies seeking to reduce the volume of carbon emissions while maintaining or increasing profitability must replace production equipment with more fossil fuel-efficient production equipment or use renewable energy sources to reduce the volume of carbon emissions. These efforts to reduce carbon emission volumes can result in a reduction in the company's carbon intensity from scope 1 carbon emission volumes. Other efforts to reduce the volume of carbon emissions can be done by purchasing lower carbon raw materials or purchasing energy from electricity suppliers so as to reduce the volume of scope 2 carbon emissions. Aswani et al. (2023) and Nordhaus, (2019) emphasize that the carbon intensity proxy can be a more appropriate measure to capture the comparison of carbon use efficiency between companies.

Hoffmann and Busch (2008) state that carbon intensity metrics reflect a company's carbon efficiency and increase transparency among companies in terms of emissions management. Evaluation based on carbon intensity provides insight into a company's

ability to manage emissions relative to its business activities. Carbon intensity measures physical carbon performance by comparing carbon emissions to business indicators such as sales or cost of goods manufactured, thus showing the relationship between environmental impact and company performance. Research by Li et al. (2014), Jung et al. (2016), Maaloul (2018), Palea and Drogo (2020), Pizzutilo et al. (2020), and Al Rabab'a et al. (2023) using a measure of carbon intensity found a positive relationship between carbon emissions and the cost of corporate debt, so the second hypothesis was developed using a measure of corporate carbon intensity and is stated as follows. H2: Carbon emission intensity has a positive effect on the company's cost of debt.

Based on these reasons, the research framework can be shown in Figure 1. In Figure 1 there are two independent variables and four control variables.

Carbon emission data and financial data were obtained from sustainability reports and company annual reports. The total research data is 1023 observations. The statistical description of the research variables is presented in Table 2 below.

The results of hypothesis testing show that carbon risk, proxied by the volume of carbon emissions or the intensity of carbon emissions, has no impact on increasing the cost of corporate debt. Creditors have not fully included carbon risk in determining the cost of corporate debt and pay more attention to the company's fundamental performance. Fama and French (2002) state that the cost of debt is the return expected by creditors by considering the risk of corporate default. Creditors view companies that have good fundamental performance as less risky. Companies that are able to utilize debt to increase profits, increase growth and enlarge company assets are considered less risky. Aswani et al. (2023) and Nordhaus (2019) argue that the volume of corporate carbon emissions is largely determined by production volume, so efforts to increase corporate profits and growth by increasing the amount of corporate assets from debt capital lead to increased corporate carbon emissions. This suggests that creditors' interests, which are reflected in the cost of debt, only consider the company's fundamental performance and ignore carbon risk, as it increases the volume of the company's carbon emissions. Nonetheless, the robustness test on industries with high carbon category shows a better significance value, suggesting that the impact of carbon emission volume on the cost of debt is more pronounced for companies operating in the high carbon industry sector category. According to Palea and Drogo (2020) companies with high carbon pollution are subject to higher risk premiums, so creditors demand greater compensation by imposing higher levels of debt costs.

Tests conducted using data before the enactment of POJK No.51 in 2017, the volume and intensity of carbon emissions had a significant negative impact on the company's cost of debt, then reversed the positive insignificant impact after it was enacted in 2020. The findings suggest that the enactment of the government's carbon policy through POJK No.51 may encourage creditors to start considering carbon risk in the decision of the cost of debt charged to borrowing companies. The change from significant negative to insignificant positive indicates that carbon emissions are less impactful after the implementation of government carbon regulation. Shu et al. (2022) stated that companies with high carbon risk face higher additional costs to comply with carbon regulations, which can reduce profits and the ability to pay debt, so the carbon risk arising from government carbon policies further increases the cost of corporate debt.

In general, the findings of this study confirm the results of ADB's 2022 survey which concluded that the development of greenbonds by financial institutions in Indonesia has not shown urgent efforts to support efforts to reduce business sector carbon emissions. Financial institutions in Indonesia do not have sufficient capital to develop green credits, so companies are not motivated to develop projects related to renewable energy development to support the government's carbon policy. The lack of incentives for companies to develop projects to reduce carbon emissions is suspected to be the reason why green credit is underdeveloped, so carbon emissions do not significantly affect the cost of debt of non-financial companies in Indonesia.

This study analyzes the government's interest in realizing a low-carbon economy, and its impact on the cost of corporate debt. The government's interest is proxied by the volume of carbon emissions and the intensity of carbon emissions, while the interest of creditors who are also affected by corporate carbon risk is proxied by the cost of corporate debt. The hypotheses are tested by regressing 1023 unbalanced data obtained from observations of 255 non-financial companies on the Indonesia Stock Exchange that reported carbon emission volumes from 2017 to 2023

This study concludes that carbon risk has not been fully considered by creditors in determining the cost of corporate debt. Hypothesis testing findings show that increasing the volume and intensity of carbon emissions has not significantly affected the cost of debt of non-financial companies in Indonesia. This suggests that government regulations to reduce carbon emissions have not effectively involved creditors in encouraging green financing. As a result, the net zero emission target is potentially hampered because carbon risk is not considered financially detrimental by creditors who still rely on conventional indicators such as leverage, profitability, growth, and company size. This condition does not incentivize companies to reduce carbon emissions. In the context of stakeholder theory, the government and creditors play an important role in promoting business sustainability. The government as the main stakeholder has the authority to regulate through carbon taxes, carbon trading, or revocation of business licenses to ensure that companies do not harm the public interest.

We recognize the limitations of this study. First, this study only examines two stakeholders that influence and are influenced by corporate carbon emissions, namely the government and creditors. Future research could examine other stakeholders that are also affected by corporate carbon risk, such as shareholders, employees, suppliers, consumers and non-governmental organizations that are also affected by corporate carbon emissions. Future research can also examine the impact of stakeholders on capital structure policy because the cost of debt is related to the cost of capital, so it has an impact on the company's capital structure policy. On the other hand, studies on how financial institutions behave in the capital market in response to corporate carbon emissions are also needed because financial institutions play a major role in efforts to reduce corporate carbon emissions.

The second limitation is that this study only examines companies that report carbon emission volume, which is 255 companies, while the number of non-financial companies listed on the Indonesia Stock Exchange data in 2020 is 662 companies. Future research can also examine the difference in debt costs between companies that report carbon emission volumes and companies that do not report carbon emission volumes in order to provide a broader picture of company and creditor behavior related to carbon risk.

Comparisons can also be made with companies that voluntarily reported carbon emission volumes before it was required by the government. Companies that report carbon emission volumes before it is required by the government are considered as companies that implement anticipatory proactive strategies in accordance with strategic management in stakeholder theory. Finally, we welcome criticism and suggestions for research improvement in order to improve the quality of academic studies to support the government's efforts to realize a low-carbon economy.