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Green and brown returns in a production economy

Author

Listed:
  • Jaccard, Ivan
  • Kockerols, Thore
  • Schüler, Yves

Abstract

Does it pay to invest in green companies? In countries where a market for carbon is functioning, such as those within the European Union, our findings suggest that it should be beneficial. Using a sample of green and brown European firms, we initially demonstrate that green companies have outperformed brown ones in recent times. Subsequently, we develop a production economy model in which brown firms acquire permits to emit carbon into the atmosphere. We find that the presence of a well-functioning carbon market could account for the green equity premium observed in our data. Incorporating a preference for green financial assets is also unlikely to overturn our results. JEL Classification: E32, Q51, G18

Suggested Citation

  • Jaccard, Ivan & Kockerols, Thore & Schüler, Yves, 2025. "Green and brown returns in a production economy," Working Paper Series 3030, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253030
    Note: 737337
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp3030~acb29d20cc.en.pdf
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    More about this item

    Keywords

    asset pricing; composite habits; equity premium; general equilibrium; monopolistic competition;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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