Carbon dioxide and asset pricing: Evidence from international stock markets

We use carbon dioxide (CO${}_{\text{2}}$) emissions growth to measure consumption risk within a consumption-based capital asset pricing model framework. Given the comprehensive worldwide coverage of CO${}_{\text{2}}$ emissions, this measure allows us to use the full history of stock market data in the US, Europe, the world, and fifteen international markets. For the US (Europe/the world), we are able to explain the observed equity market premium with a relative risk aversion of 6 (10/12), which is less than half the size of that estimated using the canonical expenditures-based consumption growth measure. The average estimated relative risk aversion across fifteen other international markets is 5. We also find evidence that the growth of CO${}_{\text{2}}$ emissions is a priced risk factor that captures the cross section of stock portfolio returns.