Oil-Driven Greenium

Abstract

Driven by climate policy risk and investor pressure, many argue that carbon-intensive firms face increased costs of capital, creating a “greenium” favoring green firms. We challenge this view, showing that oil demand fluctuations drive much of the greenium variation by boosting product prices and growth prospects for carbon-intensive, oil-dependent firms, thereby reducing their relative cost of capital. This effect holds across U.S. bonds, equities, and international markets. Revisiting key climate-related events like the Paris Agreement, we find that investor discipline plays a minimal role once oil’s impact is considered. These results suggest that markets may be less climate-responsive than expected.

Keywords: climate change, ESG, green premium, oil, omitted variable

JEL Classification: G1, G10, G12, G15, Q51