Asset-level measurement for Climate Risks: Carbon betas in the Eurozone
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This paper researches asset-level climate risks, through a carbon beta in the Eurozone. The carbon beta is the sensitivity of an asset towards the brown minus green portfolio. The brown minus green portfolio is constructed by taking a long-position in the 30% most pollutive companies and a short-position in the 30% least pollutive companies. The level of pollution is measured by the Greenhouse Gas scope 1 & 2 CO2 emissions. The brown minus green portfolio is a self-financing portfolio. The carbon beta is validated through industry-level and country-level carbon betas, which align with expectations about climate level exposure in industries and countries. The existence of a pollution premium is researched through regressing excess returns on the carbon beta whilst controlling for known return factors. The results are mixed. There is no pollution premium across sectors and Eurozone countries, however there is a large negative pollution premium within industries and Eurozone countries.