Global Pricing of Carbon-Transition Risk

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.