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How does carbon transition risk drive corporate diversification? Evidence from heavy emitter firms in China

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  • Hoang, Khanh
  • Nguyen, Cuong
  • Huynh, Toan Luu Duc
  • Zhang, Hailiang
  • Vu, Van Thi Thuy

Abstract

Carbon-intensive firms are increasingly exposed to carbon transition risks stemming from evolving climate policies, forcing them to adapt to a low-carbon economy. While prior research focuses on direct environmental initiatives to mitigate carbon transition risks, limited attention has been given to corporate diversification as an alternative strategy. This study investigates the impact of carbon transition risks on revenue diversification of Chinese listed firms, employing a difference-in-differences framework with the Paris Agreement as an exogenous shock. We find a significant increase in diversification of heavy-emitting firms following the Paris Agreement compared to their counterparts, without a corresponding increase in environmental investments or green technology adoption. This response is notably pronounced among firms with state ownership and is weakened when investment irreversibility is high. The findings align with the real options perspective and provide new insights into corporate responses to climate policy changes within the unique context of China.

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  • Hoang, Khanh & Nguyen, Cuong & Huynh, Toan Luu Duc & Zhang, Hailiang & Vu, Van Thi Thuy, 2025. "How does carbon transition risk drive corporate diversification? Evidence from heavy emitter firms in China," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 1971-1994.
    • Handle: RePEc:eee:ecanpo:v:85:y:2025:i:c:p:1971-1994
    DOI: 10.1016/j.eap.2025.02.033
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    More about this item

    Keywords

    Asset liquidation; Carbon transition risk; China; Corporate diversification; Environmental protection; State ownership;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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