Carbon pricing and the commodity risk premium

Qiao Wang

Journal of Commodity Markets, 2024, vol. 36, issue C

Abstract: This paper examines whether the carbon pricing risk factor is priced in the cross-section of commodity futures. By analyzing unexpected pricing shocks in carbon emission allowances, carbon pricing risk is indeed priced in commodity futures, with a significant positive risk premium. The analysis of carbon pricing risk loadings reveals that individual commodities' sensitivities to carbon pricing risk vary. Additionally, commodity-specific characteristics, such as basis and hedging pressure, impact these risk loadings. Finally, I demonstrate that a portfolio of commodity futures constructed based on carbon pricing beta provides superior out-of-sample hedging performance for climate change risk compared to alternative hedge portfolios using equities or ETFs.

Keywords: Climate finance; Commodity market; Investment-based asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 Q02 Q54 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:36:y:2024:i:c:s2405851324000667

DOI: 10.1016/j.jcomm.2024.100447

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