RT Journal Article SR Electronic T1 The Carbon Risk Premium JF The Journal of Alternative Investments FD Institutional Investor Journals SP 33 OP 64 DO 10.3905/jai.2022.1.166 VO 25 IS 1 A1 Michael Azlen A1 Glen Gostlow A1 Alex Child YR 2022 UL https://pm-research.com/content/25/1/33.abstract AB This article provides an overview of compliance carbon markets that trade carbon emission allowances and analyzes the properties of carbon as an investable asset class. The authors discuss how local supply and demand factors determine allowance prices, focusing on abatement costs and policy adjustments. They then construct a novel total-return time series for four liquid carbon markets and develop an equally-weighted Carbon Composite. They found that individual carbon markets are uncorrelated to each other and commodities and asset classes unrelated to idiosyncratic market fundamentals. The Carbon Composite generated an annualized excess return of 26.63% and a Sharpe Ratio of 1.50 over 2013–2021, suggesting that carbon as an investable asset class could provide tangible diversification benefits to investors. The authors then explore the outlook for carbon as an asset class and identify theoretical and practical justifications for a prospective carbon risk premium.