Despite the theoretical benefits of carbon pricing in combating climate change, many countries seem reluctant to adopt such policies. To address these concerns, we utilize the staggered enactment of carbon pricing initiatives across jurisdictions to evaluate their impacts on publicly listed firms worldwide. We observe triadic effects. First, carbon pricing initiatives impose a financial redistribution effect on firms, reducing the profitability
of high-emission firms. Second, high-emission firms receive a lower market valuation, which is driven mostly by the cash flow channel as opposed to the discount rate channel. Lastly, high-emission firms also reduce investments. Importantly, carbon pricing initiatives do not reduce aggregate profitability, firm value, or investments in the policy-initiating jurisdictions. Rather, they shift profits and investments from high- to low-emission firms, implying a net gain in carbon efficiency. Our results have significant policy implications.
