Do Carbon Emissions Affect Stock Returns? Causal Evidence from a Supreme Court Ruling

Considering the importance of corporate carbon emissions, the Supreme Court of the United States ruled against the Environmental Protection Agency (EPA) and curtailed EPA’s regulatory powers by unprecedentedly invoking the “major questions doctrine” in its judgment of West Virginia v. EPA in 2022. We find that the stock prices of firms with greater exposure to carbon risk increased relative to firms with lower exposure after the Supreme Court verdict. The results are more pronounced for firms subject to higher federal climate enforcement intensity prior to the court ruling. Long-term climate commitments by state governments and carbon-sensitive institutional investors attenuate the effect. Both cash flow and discount rate contribute to the climate risk effect in firm value. Overall, our findings from this landmark climate litigation suggest that climate transition risks can affect stock prices. This paper was accepted by Lin William Cong, finance. Funding: Funding support by Hong Kong General Research Fund [Grant 17501825] is gratefully acknowledged. This work was supported by National Natural Science Foundation of China [Grants 72172082 and 72342021 (C. Shan)]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.06732 .