Governments institute carbon pricing to curb emissions. We show increasing carbon futures prices on the European Trading Scheme (ETS) decrease the carbon news equity premium but only in brown firms. This premium is obtained from a panel regression on firm-level sentiment scores. The premium varies across industries and countries, and separate into short and long term components identified by news topics on emissions and environmental innovation respectively. The changes in carbon premium are in line with increased investors’ concerns on environmental issues post COP 2016. Regression results on the carbon premium with the carbon futures returns as explanatory economic variables show R2 up to 41% in Germany and 21% in United States. A firm model of investment is developed to explain the economic impact of carbon prices on the carbon equity premium and validate the empirical findings.