Price of Tomorrow? Pricing Future Carbon-Transition Risk

Sammanfattning

This paper is divided into two parts: The first part estimates the stock market's pricing of future unpriced carbon costs and uncovers the firm-level future carbon-transition risk on a global sample of 8,821 unique firms. I find evidence of an annual unpriced carbon-transition risk premium of 2.5% to 3.2% related to firms' future carbon costs across the forecast years 2030, 2040, and 2050 under three carbon cost scenarios. The premium is positively associated with increases in the carbon cost scenario. However, I only find mixed evidence of a transition premium related to estimated future margin reductions due to increased carbon costs. Next, the findings suggest that particularly brown firms are systematically penalized across industries and countries, and the analysis also indicates that the ten most exposed industries are subject to heightened carbon-transition risk premiums. The second part of this paper estimates whether firm-level green innovation constitutes a significant mitigating factor in the pricing of carbon-transition risk using stock market data on 3,404 unique firms in 70 countries between 2016 and 2022. The results imply that green innovation does not significantly reduce the carbon-transition premium related to future carbon costs. Narrowing the focus to firms within the top five industries most exposed to carbon price increases according to Trucost, I find results indicating that the best green innovators within these brown industries experience a muting effect on the carbon-transition premium. However, the evidence diminishes when controlling for time-invariant country characteristics, underscoring the variability of countries' exposures and regulations related to climate change.