University of Oxford
Are financial markets pricing the net zero carbon transition? A reconsideration of the carbon premium
December 11, 2023 – 05:15 – 06:30 PM (CET)
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Prior research has highlighted a positive correlation between realised returns and carbon emissions. This paper shows that this carbon premium might be partially due to mispricing produced by climate policy uncertainty. For this reason, realised returns may not be representative of expected returns. To show that, I develop an asset pricing model with uncertain expectations about the future cash flows of fossil fuels firms. The price-dividend ratio increases with uncertainty about a climate policy regime shift. This proposition is confirmed empirically using data on analysts’ forecasts. I find that analysts’ forecasts disagreement – as a proxy for climate policy uncertainty – might explain part of the valuations of a large sample of fossil fuels stocks. Using my model, I show with forward-looking scenarios that cash flows expectations implied in the valuations of fossil fuels firms may not be consistent with a net zero carbon transition. Read more
Matteo Gasparini is a DPhil (PhD) candidate at the University of Oxford's Smith School of Enterprise and Environment (SSEE) and the Institute for New Economic Thinking (INET). He is also an External Advisor to McKinsey & Co. and External Lecturer in Sustainable Finance at Skema Business School in Paris. His research studies the Financial Economics of Climate Change and Sustainability, focusing on the implications of climate change for firms’ valuations and financial regulation.
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