Carbon risk and equity prices

We study the effects of carbon transition risk on equity prices in the United States and Europe using disclosed carbon intensity data and find a negative effect on the cross section of returns and a negative carbon premium for the period 2009–2019. Examining fund flows, we find that institutional investors had an aversion to carbon‐intensive stocks, which could help explain the outperformance of green stocks. We find that after the Paris Agreement this negative carbon premium disappears, and expect a positive premium in the future. We apply an asset‐pricing approach to quantify the carbon risk exposure of any given asset.