Despite the growing integration of artificial intelligence (AI) into business models, studies of its impact on corporate climate change exposure remain scarce. Through an examination of AI-related innovations among US-listed firms from 2001 to 2019, we present compelling evidence that AI innovation effectively mitigates firms’ climate change exposure. In particular, it reduces firms’ exposure to regulatory and physical risks related to climate change through improved carbon management efficiency, with computer vision and control and planning being the most effective types in this context. Our findings are particularly pronounced for mature firms and those facing greater regulatory intervention. The results withstand rigorous tests that address endogeneity concerns. Our study provides strong support for firms to adopt AI innovations to achieve carbon neutrality, contributing to the ongoing discourse regarding AI trade-offs. Our findings also offer valuable insights into the development of climate risk mitigation strategies.

This paper analyzes the market microstructure of the European Climate Exchange, the largest EU ETS trading venue. The ECX captures 2/3 of the screen traded market in EUA and more than 90% in CER. Volume growth has averaged 277% in EUA between 2005 and 2009 and 724% in CER since 2007. Spreads range from €0.0188 to €0.0406 for EUA and €0.0276 to €0.0796 for CER. The median proportion of the spread due to adverse selection reaches 76% for EUA and 75% for CER. Realized volatility, bid-ask spreads and adverse selection costs decline with verified emission releases. Market impact estimates imply that an average trade will move the EUA market by 1.06 euro centimes and the CER market 1.45. The ECX is providing between 75% and 88% of price discovery for EUA trading and between 64% and 72% for CER. We find imbalances in the order book help predict returns for up to three days. A simple trading strategy that enters the market long or short when the order imbalance is strong is profitable even after accounting for spreads and market impact.

We study the production effects of one of the largest bank branch expansion programs in history, implemented by the government of India during the 1980s. Combining policy-driven variation with newly-digitized data on bank lending and crop prices at the district-year level, we do not find evidence for a significant shift in agricultural output and inputs on average. Greater bank presence does promote resilience to climate risk, however, by attenuating the effect of lagged rainfall shocks on output. This effect operates via changes in the incidence of cropping during the dry winter season, which makes use of costly irrigation resources.

Financial market information can provide an objective assessment of losses anticipated from temperature changes. In an APT model in which temperature shocks are a systematic risk factor, the risk premium is significantly negative, loadings for most assets are negative, and asset portfolios in more vulnerable industries have stronger negative loadings on a temperature shock factor. Weighted average increases in the cost of equity capital attributed to uncertainty about temperature changes are 0.22 percent, implying a present value loss of 7.92 percent of wealth. These costs represent a new channel that may contribute to cost of climate change assessment.

Using an international sample of 38 countries, we find that firms located in countries experiencing greater socioeconomic damage from extreme climate events have higher implied costs of equity capital. This finding is attributed to heightened operational uncertainty, greater information asymmetry, and intensified agency conflicts that arise in the wake of extreme climate events. The relation is stronger for firms that derive substantial revenue from domestic markets, operate in climate-vulnerable industries, or are closely held by domestic institutional investors. The effect also varies across countries and is concentrated in markets characterized by low transparency or limited integration into the global financial market. While extreme climate events negatively influence firm performance and valuation, they raise corporate awareness of climate risk.