Inflation and the Carbon Premium

This paper explores the link between inflation and the carbon premium of U.S. listed companies. Prior evidence has established that investors demand a return premium for stocks of companies with higher (direct and indirect) carbon emissions. We find new evidence that this carbon premium is higher in the presence of energy price inflation. For values of energy CPI equal to the sample mean, a one-standard deviation change in direct emissions is associated with a 2 percentage-point higher annual return premium, and this return premium increases by 44% when aggregate energy prices are higher by one standard deviation of their in-sample distribution.