Estimating Carbon-Price Effects on Equity Returns for Scenario Analysis

Summary

The document describes a proposed way to adapt long-horizon simulated stock returns to alternative climate scenarios. The author plans to use shocks for factors such as temperature and carbon prices. For temperature, the question cites existing literature relating a degree of warming to a stock-return effect. For carbon pricing, it proposes grouping sectors by their exposure and estimating a separate regression for each group using portfolio returns and carbon prices over a historical sample, then applying the resulting beta as a scenario shock.

The document asks whether that regression is appropriate but includes no answer, results, or empirical validation. It therefore raises a useful modeling question rather than establishing a method. In particular, the excerpt does not explain how exposure categories are defined, what controls or return frequency the regressions would use, or how historical relationships would remain relevant in scenarios extending far beyond the observed period.

Key ideas

• The proposed climate scenario analysis adjusts simulated equity returns using factor shocks.
• Temperature shocks are intended to draw on literature relating warming to stock returns.
• For carbon pricing, the author proposes estimating return sensitivities within exposure-based sector groups.
• The excerpt provides no answer or evidence that historical regression estimates will transfer to distant future scenarios.

Tags

# Quantify different factors effect on stock returns for scenario analysis


# Quantify different factors effect on stock returns for scenario analysis












I am currently doing a scenario analysis using all different SSP scenarios. I simulated returns from 2025 until 2100 and I want to adapt the returns to the different scenarios by applying some different factor shocks on the returns. I chose carbon price, temperature etc ... I found some litterature for temperature in order to quantify the shock (eg. a 1 degree increase result in -X % on stocks) but for carbon pricing I will do an approach by classifying sectors by exposition and then apply different shocks depending on exposition. Is it a correct approach to run a regression (for each category) using previous portfolio returns and carbon price from 2010 until 2025 to get a beta that will be quantifying the effect on stock returns?

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