Does the Carbon Premium Reflect Risk or Mispricing?

Does the Carbon Premium Reflect Risk or Mispricing?

Yigit Atilgan, K. Ozgur Demirtas, Alex Edmans, A. Doruk Gunaydin

Series number :

Serial Number: 

Date posted :

November 20 2023

Last revised :

November 20 2023
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  • Carbon Premium • 
  • climate finance • 
  • socially responsible investing • 
  • Corporate Social Responsibility • 
  • ESG investing

Prior research has documented a carbon premium in realized returns, which has 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.


Real name:
Yigit Atilgan
Real name:
A. Doruk Gunaydin
Real name:
K. Ozgur Demirtas