The carbon premium: Correlation or causality? Evidence from S&P 500 companies

Namasi G. Sankar, Suryadeepto Nag, Siddhartha P. Chakrabarty and Sankarshan Basu

Energy Economics, 2024, vol. 134, issue C

Abstract: In the context of whether investors are aware of carbon-related risks, it is often hypothesized that there may be a carbon premium in the value of stocks of firms, conferring an abnormal excess value to firms’ shares as a form of compensation to investors for their transition risk exposure through the ownership of carbon intensive stocks. However, there is little consensus in the literature regarding the existence of such a premium. Moreover few studies have examined whether the correlation that is often observed is actually causal. The pertinent question is whether more polluting firms give higher returns or do firms with high returns have less incentive to decarbonize? In this study, we investigate whether firms’ emissions is causally linked to the presence of a carbon premium in a panel of 141 firms listed in the S&P 500 index using fixed-effects analysis, with propensity score weighting to control for selection bias in which firms increase their emissions. We find that there is a statistically significant positive carbon premium associated with Scope 1 emissions, while there is no significant premium associated with Scope 2 emissions, implying that risks associated with direct emissions by the firm are priced, while bought emissions are not.

Keywords: Carbon premium; Carbon risk; Sustainable finance; Transition risk; Green finance (search for similar items in EconPapers)
JEL-codes: G10 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:134:y:2024:i:c:s0140988324003438

DOI: 10.1016/j.eneco.2024.107635

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