Oil-Driven Greenium

Abstract

As climate attention grows, many argue that investors discipline carbon-intensive firms by increasing their costs of capital, creating a “greenium” favoring green firms. We challenge this view, demonstrating that the observed greenium variation is largely driven by oil demand fluctuations, which boost product prices and growth options for carbon-intensive firms, reducing the greenium. This pattern holds across U.S. bonds, equities, and international markets. Revisiting key climate-related events, like the Paris Agreement, we find that once oil’s impact is considered, investor discipline often plays a negligible role. Our findings indicate investors may be less responsive to the climate crisis than anticipated.