Corporate Climate Risk and Membership of Emission Trading Schemes

ABSTRACT Using a sample of 5364 firms from 65 countries, we demonstrate that membership in the scheme increases firm climate risk. Further analysis reveals that the positive impact of membership on climate risk is pronounced among firms in carbon‐intensive industries. Our findings demonstrate that continental differences and legal origin could moderate or exacerbate the relationship between emission trading schemes (ETSs) and corporate climate risk. Similarly, the positive relationship between ETSs and corporate climate risk is only significant in the period after the Paris Agreement. This indicates that public interest in climate change discussions may have driven membership in the initiative rather than reflecting a real commitment to reducing carbon emissions. Additionally, we show that membership has short‐ to medium‐term effects on corporate climate risk. Our results are robust to a battery of tests such as propensity score matching (PSM) and generalized method of moments (GMM).