Climate Policy Uncertainty and Transition Risk in High-Carbon Industries: Evidence from China

Abstract

Managing the transition risks of carbon-intensive firms is essential for reconciling climate governance with the stable operation of the real economy; nevertheless, existing scholarship has yet to fully elucidate how climate policy uncertainty contributes to the formation of these risks. In this paper, we develop a firm-specific measure of climate policy uncertainty exposure by integrating China’s aggregate climate policy uncertainty index with climate-risk-related textual data retrieved from listed companies’ annual reports. Drawing on a panel dataset of A-share listed companies in nine carbon-intensive sectors over 2010–2023, we employ a partial-linear double/debiased machine-learning methodology to investigate how climate policy uncertainty exposure influences multidimensional firm transition risk. Our baseline estimations indicate that greater climate policy uncertainty exposure is associated with a statistically significant rise in transition risk among high-carbon firms, with the preferred model producing a coefficient estimate of 0.0243. These findings remain robust to an array of sensitivity checks and endogeneity-correction procedures. Mechanism analysis provides evidence consistent with four potential channels involving weaker intra-industry competition, lower corporate risk-taking, tighter financing constraints, and higher agency costs. Heterogeneity examinations reveal that the detrimental impact is particularly evident among larger enterprises, high-technology companies, and firms characterized by comparatively lower pollution levels. Further analysis based on conditional average treatment effects and best linear predictors reveals that media supervision and the presence of long-term institutional investors substantially reduce the extent to which climate policy uncertainty translates into firm transition risk. This study provides firm-level empirical evidence elucidating how climate policy uncertainty shapes multidimensional transition risk in the low-carbon transformation of high-carbon industries.