Does the European equity market show evidence of a carbon premium?

Abstract

Risk measures have always been central to financial research. With global development towards sustainable solutions and decarbonization of the atmosphere, new risk classifications have emerged. Carbon risk, as a concept, is relatively new and related to the risks an entity faces by emitting greenhouse gases. Since the conception of the Paris Climate Agreement, all climate considerations have increased, and carbon risk has become a more prevalent risk factor. This dissertation investigates whether the European Equity markets reflect a carbon premium from 2017 until the end of 2022. Through conducting a panel regression on the Eurostoxx 600, the analysis uncovers a statistically significant relationship between carbon emission and stock returns. The relationship is controlled for by including a wide range of known stock predictors and further analyzed by dissecting it into individual industries. We find evidence that the premium has risen relative to earlier periods in other markets, indicating that as awareness and regulatory focus on climate issues intensify, so does the associated risk premium.

Date of Award	2 Jul 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Carla Sofia Soares (Supervisor)