Carbon Risk Premium and Worries about Climate Change

Abstract

This paper sheds light on the impact of investor worries about climate change on the pricing of emission (carbon-intensive) and clean (low-emission) stocks. We estimate the carbon risk premium in a cross-section of over 4,800 firms in 21 countries. We do not find evidence of a carbon risk premium when investor worries about climate change are low. Moreover, the carbon premium is significant for medium-high quantiles of the return distribution when investors’ worries are high. Overall, our results are consistent with an interpretation that non-worried investors are not demanding compensation for their exposure to carbon emission risk.