Carbon Pricing Shocks and Emerging Market Factor Returns: Evidence from China’s National ETS and Cross-Country Panel Data

This paper documents a statistically robust negative effect of carbon pricing on emerging market (EM) equities: a one-unit monthly carbon price surprise reduces total EM returns by 1.29 percentage points, driven by market-traded prices from China’s Emissions Trading System (ETS). Decomposing the composite index reveals that only market-traded ETS prices drive this result; administrative carbon tax announcements exhibit no significant effect. Four directionally consistent but statistically weaker patterns are reported as descriptive evidence: SMB rises with ETS surprises; a synthetic brown factor widens; the EM value premium shows a secular declining trend; and a country-level difference-in-differences is consistent with the hypothesis. Climate Transition Sensitivity Index (CTSI) is introduced as a publicly replicable screening tool. These findings suggest that policymakers should prioritise market-based ETS mechanisms over administrative taxes to ensure efficient price discovery, and international climate finance should target high-sensitivity jurisdictions to mitigate equity market volatility during early-stage carbon pricing implementation.