Transition risk beyond carbon intensity

As carbon prices rise and their coverage expands across sectors and borders, understanding their financial impact on firms becomes increasingly important for policymakers and investors alike. This paper quantifies how changes in carbon prices affect stock valuations, using a panel dataset of 180 major European firms over 2009–2023. The empirical strategy isolates the stock price response to weekly carbon price fluctuations and exogenous shocks, guided by a theory-based framework. The analysis incorporates firm-level data on direct and indirect carbon cost exposure, free allowance allocation, decarbonization plans, pass-through capacity, and hedging portfolios. The findings show that stock markets price carbon risk in line with economic fundamentals: firms with high net carbon costs and weak abatement plans face stronger valuation losses, while those with mitigation strategies or cost pass-through capacity are less affected. The effects are statistically and economically significant, particularly among the most exposed firms. These results underscore the need for granular transition risk metrics that go beyond headline emissions figures.