|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.