Asset Returns as Carbon Taxes
Abstract
"In frictionless financial markets, a carbon tax on energy users provides the same incentives asa ""replicating"" cost-of-capital schedule that depends on firms’ emission intensities, defined
as scope 1 emissions relative to enterprise value. At currently observed emission intensities
for the US economy, the fat right tail of the replicating return distribution is far beyond
empirical estimates of pollution premia. Nevertheless, endogenous adjustment implies high
carbon taxes are consistent with modest equilibrium return differentials. With heterogeneous
preferences over dirty portfolios, emissions fall by more if a few green investors obtain
nonpecuniary benefits from clean investments than when a majority perceives nonpecuniary
costs."