Namasi G. Sankar, Suryadeepto Nag, Siddhartha P. Chakrabarty, Sankarshan Basu
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The Carbon Premium: Correlation or Causation? Evidence from S&P 500 Companies
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 instensive 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\&P500
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.