Do Carbon Policy Shocks Move Stocks? Evidence from China’s Carbon Market

Amid the global push for net-zero, carbon policies have become a central driver of transition risk, with carbon market reactions providing timely signals for equity pricing. Using daily high-frequency data for over 1,600 listed firms from July 2021 to December 2025, we construct a measure of carbon policy shocks and assess how carbon policy fluctuations move stock returns within a two-way fixed-effects framework. Results show that carbon price changes on policy event days exert a significantly stronger influence on stock returns than those on non-event days, transmitted through risk expectation and liquidity channels. Heterogeneity analysis reveals that this effect varies with carbon market maturity, size, and firms’ emission control status. Our findings provide policy-shock-based evidence on the pricing of transition risk in China, enriching the carbon finance literature and offering implications for policy design.