Carbon Emissions Trading and Corporate Low-Carbon Transition Risk: Evidence from China’s Pilot Carbon Markets

Under China’s dual carbon goals, low-carbon transition risk has become an important source of corporate sustainability risk and climate-related financial risk. This study treats the carbon emissions trading pilot (CETP) as a quasi-natural experiment and uses panel data of Chinese A-share listed firms from 2006 to 2024 to examine whether carbon trading reduces corporate low-carbon transition risk (CTR). CTR is measured as the sensitivity of firm stock returns to return shocks from a stranded-asset portfolio, thereby capturing market-implied exposure to high-carbon asset revaluation risk. The results show that the CETP significantly reduces corporate CTR. Economically, the fully controlled DID coefficient is about one tenth of the standard deviation of CTR, indicating a meaningful decline in firms’ exposure to stranded-asset shocks. The conclusion remains robust after using alternative CTR measures, shortening the sample period, applying staggered DID based on actual pilot launch years, controlling for province-level time-varying factors and province-specific trends, controlling for concurrent green policies, conducting placebo tests, applying PSM-DID, and retaining the instrumental-variable test. Mechanism tests provide evidence consistent with a carbon performance channel. Evidence on capital expenditure is interpreted cautiously because Capex is a broad proxy for investment intensity and asset adjustment rather than a direct measure of green upgrading. Heterogeneity analysis shows that the risk-reducing effect is stronger among non-state-owned firms, high-tech firms, and firms located in eastern China. These findings suggest that carbon pricing can serve not only as an emissions-reduction instrument but also as a mechanism for mitigating climate-related financial risk.