Carbon Markets and Stock Prices

Climate change represents an economic challenge that has prompted governments to adopt emission-reduction commitments and implement carbon markets as market-based regulatory instruments. Despite their policy relevance, carbon markets are exposed to macroeconomic and geopolitical shocks, generating persistent and hard-to-diversify volatility. With the progressive expansion of these systems, carbon price uncertainty—namely, the difficulty faced by firms and investors in forecasting carbon prices—has emerged as a potentially driver of financial instability. Stock price crash risk, understood as the probability of extreme downward price movements within a short horizon, is generally attributed to both firm-level and market-wide mechanisms. From an internal perspective, managers may strategically withhold unfavorable information to protect private interests, leading to abrupt price corrections when concealed bad news. From an external perspective, heterogeneous beliefs and short-selling frictions may delay the incorporation of negative information into prices, fostering overvaluation that eventually unwinds through coordinated selling. Past literature showed a positive relationship between carbon price uncertainty and crash risk in China. Extending this framework, the present study investigates European listed firms (2005–2024) using a dynamic panel approach, alternative crash-risk measures, and channel analyses accounting for information asymmetry, industry pollution intensity, and the post-2016 Paris Agreement environment.