Quantifying Downstream Value Chain Carbon Risk: A Six-Factor Asset Pricing Model for China’s Low-Carbon Transition

Sustainable finance and carbon risk have attracted substantial interest from both practitioners and scholars. This paper integrates the income-based environmental responsibility framework with financial asset pricing models to investigate how carbon transition risk propagates along value chains and impacts asset returns. By utilizing the Ghosh supply-driven input–output model to quantify downstream value chain carbon emissions as a proxy for the dependence of a company’s revenue streams on high-carbon downstream clients, we construct a novel downstream carbon risk factor (DMC) by sorting stocks into portfolios based on this exposure and forming a factor mimicking long short portfolio. We then integrate this DMC factor into the Fama–French five-factor framework to propose a six-factor model capable of capturing value chain risk transmission. Empirical results of Chinese A-share listed companies demonstrate that firms with high DMC exposure, being vulnerable to carbon transition shocks such as carbon pricing, offer a significant risk premium even after controlling for traditional financial characteristics. This finding provides robust evidence for the carbon premium hypothesis in the world’s largest emerging market and contributes a theoretically grounded and empirically implementable framework for integrating value chain carbon risk into asset pricing analysis.