Does the Carbon Premium Reflect Risk or Mispricing?

Yigit Atilgan, Ozgur Demirtas, Alex Edmans and Doruk Gunaydin

No 18594, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Prior research has documented a carbon premium in realized returns, which have been assumed to proxy for expected returns and thus the cost of capital. We find that the carbon premium partially represents unexpected returns and thus mispricing. Companies with higher scope 1, scope 2, or scope 3 emissions enjoy superior earnings surprises and earnings announcement returns; quarterly earnings announcements account for 30-50% of the premium. We find similar results for changes in emissions but not scaled emissions, consistent with earlier findings on realized returns. Our results suggest that the carbon premium, where it exists, partially results from an unpriced externality, highlighting the need for government action.

JEL-codes: G12 G23 G38 J53 J81 J83 J88 K31 (search for similar items in EconPapers)
Date: 2023-11
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