Working Paper: NBER ID: w28510
Authors: Patrick Bolton; Marcin Kacperczyk
Abstract: Companies are exposed to carbon-transition risk as the global economy transitions away from fossil fuels to renewable energy. We estimate the market-based premium associated with this transition risk at the firm level in a cross-section of over 14,400 firms in 77 countries. We find a widespread carbon premium—higher stock returns for companies with higher levels of carbon emissions (and higher annual changes)—in all sectors over three continents, Asia, Europe, and North America. Short-term transition risk is greater for firms located in countries with lower economic development, greater reliance on fossil energy, and less inclusive political systems. Long-term transition risk is higher in countries with stricter domestic, but not international, climate policies. However, transition risk cannot be explained by greater exposure to physical (or headline) risk. Yet, raising investor awareness about climate change amplifies the level of transition risk.
Keywords: No keywords provided
JEL Codes: G12; Q51; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher levels of carbon emissions (P18) | higher stock returns (G17) |
| lower economic development (O54) | greater short-term transition risk (P34) |
| greater reliance on fossil energy (P18) | greater short-term transition risk (P34) |
| stricter domestic climate policies (Q58) | higher long-term transition risk (P27) |
| raising investor awareness about climate change (F64) | amplifies transition risk (F65) |
| absolute levels of emissions (Q52) | carbon premium (Q58) |
| annual changes in emissions (Q52) | carbon premium (Q58) |