Understanding the Pricing of Carbon Emissions: New Evidence from the Stock Market

Matteo Crosignani, Emilio Osambela and Matthew Pritsker
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Emilio Osambela: https://www.federalreserve.gov/econres/emilio-osambela.htm

No 1161, Staff Reports from Federal Reserve Bank of New York

Abstract: Are carbon emissions priced in equity markets? The literature is split with different approaches yielding conflicting results. We develop a stylized model showing that, if emissions are priced, stock returns depend on expected emissions and the product of the innovation in emissions and the price-dividend ratio. Building on this insight, we derive and test new predictions. We find that emissions are priced in equity markets, but the magnitude of such pricing is highly sensitive to the inclusion of a few “super emitters” (mostly operating in electric power generation). Our theoretical insight also helps reconcile seemingly divergent results in the literature.

Keywords: carbon emissions; stock returns; cost of capital; ESG (search for similar items in EconPapers)
JEL-codes: D62 G11 G12 Q54 (search for similar items in EconPapers)
Pages: 63
Date: 2025-08-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:101379

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DOI: 10.59576/sr.1161

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