The Carbon Risk Premium

This article provides an overview of compliance carbon markets that trade emission allowances and analyzes the properties as investable asset class. The authors discuss how local supply demand factors determine allowance prices, focusing on abatement costs policy adjustments. They then construct a novel total-return time series for four liquid develop equally-weighted Carbon Composite. found individual are uncorrelated to each other commodities classes unrelated idiosyncratic market fundamentals. Composite generated annualized excess return 26.63% Sharpe Ratio 1.50 over 2013–2021, suggesting class could provide tangible diversification benefits investors. explore outlook identify theoretical practical justifications prospective risk premium.