Climate transition risk and industry returns: The impact of green innovation and carbon market uncertainty

This study explores how climate transition risk, green innovation, and carbon market uncertainty influence industry returns in economic cycles, providing crucial insights for industry-level low-carbon transition pathways. Utilizing an input-output (IO) life-cycle assessment model, we measure the total carbon emissions and carbon intensity of 28 industries in China from 2002 to 2020, distinguishing between direct and indirect emissions. We investigate the risk premium associated with transition risk and industry returns and analyze the moderating effects of physical risk, carbon market uncertainty, and green innovation. Our findings indicate that higher transition risk correlates with lower industry returns, with physical risk exacerbating this negative impact, while carbon market uncertainty and green innovations mitigate it. The heterogeneity analysis reveals that direct carbon emissions primarily drive the negative premium. Notably, the adverse effect of transition risk on industry returns has diminished since the Paris Agreement and is more evident in industries with lower concentration levels and higher centrality degree. This research offers new evidence on the interplay between climate transition risk and economic cycles, emphasizing the role of green finance and technological innovation in forecasting and navigating future economic developments.