Carbon Emissions and Stock Returns: The Case of Russia

Russia is taking the first steps in the formation of an emissions trading system. In this article, we studied the impact of carbon risk on Russian stock returns. We link carbon risk to CO₂ emissions and air protection costs. We suggest that carbon firms are exposed to carbon risk and hence require a premium in stock returns. We use an approach based on the asset pricing methodology for carbon, carbon-free, and “carbon-minus-carbon-free” portfolios. Based on the Newey–West estimate, we perform a linear regression analysis for the period from January 2014 to December 2021. We find a positive and statistically significant carbon premium. This means that carbon firms show higher expected returns. Carbon risk does not have a statistically significant impact on the carbon premium. The carbon firms’ stock returns are not sensitive to CO₂ emissions and air protection costs. Our analysis shows that a quarter of the carbon premium is explained by the market premium and is not sensitive to size, value, and momentum premiums. Our results inform policymakers and investors about the implications of environmental regulation. Policymakers should take into account the results obtained in the development of national climate and, in general, environmental policies.