The Cross-Industrial Carbon Risi! Premium

Abstract

This thesis investigates the presence of a carbon risk premium in stock returns from 2003 to 2022 of 8,996 companies across 66 countries. We show that firms with higher carbon emissions earn higher returns while controlling for size, book-to-market, and other return predictors. Further, we examine the time variation of the carbon risk premium, highlighting that the premium increases during political decarbonization events. Additionally, we investigate the carbon premia across various sectors and find evidence of a higher carbon premium in high-emitting sectors relative to low-emitting sectors. Finally, we illustrate how to incorporate the carbon premium in portfolio allocation.