Assessing carbon transition risks: Evidence of carbon premium in Korean companies

Abstract

Amid the increasing awareness towards the climate change crisis leading to implementation of carbon policies, companies that emit high carbon emission levels are exposed to carbon transition risk as the global economy shifts away from fossil fuels to cleaner alternatives. Taking an example of Korea, this research aims to assess the financial performance of Korean companies by identifying whether there is evidence of a carbon premium due to carbon transition risk from the announcement and operation of the Korean Emissions Trading Scheme (K-ETS) policy on the stock market. The study found the existence of carbon premium in the K-ETS throughout all its period from its announcement in 2011 to its most recent compliance year in 2021, suggesting that investors are being compensated for their investments in dirty portfolio companies in relation to their high exposure to carbon transition risk. The study also finds increasing carbon premium across the years, indicating the influence of rising stringency of the carbon policy.