The impacts of climate risk on carbon return: A novel asymmetric effect with expectile regression

As climate change intensifies and the Paris Agreement is enacted, climate risk has become one of the major challenges for global economy and financial system. This study proposes an expectile-on-expectile regression (EER) model to analyze asymmetric and nonlinear impacts of Physical Risk Index (PRI) and Transition Risk Index (TRI) respectively on carbon return from January 2, 2009, to June 28, 2024, comparing pre- and post-Paris Agreement periods. The results show the impacts of PRI and TRI on carbon return are not the same, and for each climate risk, the impact patterns are also different pre- and post-Paris Agreement. Specifically, Pre-Paris, PRI exposured reduced carbon return at low expectiles (especially in adverse markets) but was positive at high returns. Post-Paris, PRI effects reversed: strongly positive at low returns and negative at high returns. This indicates the Paris Agreement institutionalized climate risk considerations, turning carbon markets from passive risk mitigation to active risk pricing and inverting the climate risk-carbon return relationship. TRI’s impact also varies across expectiles, with positive effects at low carbon return (more pronounced pre-Paris) that diminish or turn negative at higher expectiles, which is more volatile pre-Agreement. These shifts suggest that the Paris Agreement’s enhanced climate disclosures and regulatory scrutiny have fostered more systematic risk pricing, reducing excessive market fluctuations. Overall, the findings highlight the Agreement’s pivotal role in realigning carbon market behavior with climate-related financial risks, driven by growing climate awareness and institutional reforms.