It's not easy being green

Abstract

This paper investigates the cost premium associated with being green. Exploiting a large panel of prices for individual products that are nearly identical except for the fact that some are green, we find a premium of 25% to 38%. Accounting for endogeneity with both a Bartik instrument and a natural experiment suggests an even higher cost, exceeding 82%. Cost premiums vary with the amount of regulatory burden, can be linked to supply chain frictions, and are partially transient. Imputing the cost estimates in the asset pricing framework by Pastor et al. (2021) implies that environmentally conscious investors need to incur substantial losses on their investments to finance the green transition.

Keywords: Green, government procurement, sustainable investing

JEL Classification: G38; H57; P16; Q58