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Does the Carbon Premium Reflect Risk or Mispricing?

Author

Listed:
  • Atilgan, Yigit
  • Demirtas, Ozgur
  • Edmans, Alex
  • Gunaydin, Doruk

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.

Suggested Citation

  • Atilgan, Yigit & Demirtas, Ozgur & Edmans, Alex & Gunaydin, Doruk, 2023. "Does the Carbon Premium Reflect Risk or Mispricing?," CEPR Discussion Papers 18594, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18594
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J53 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Labor-Management Relations; Industrial Jurisprudence
    • J81 - Labor and Demographic Economics - - Labor Standards - - - Working Conditions
    • J83 - Labor and Demographic Economics - - Labor Standards - - - Workers' Rights
    • J88 - Labor and Demographic Economics - - Labor Standards - - - Public Policy
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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