The “Major Questions” of Carbon Emissions and Value Relevance of Climate Litigation

Considering the importance of corporate carbon emissions, the Supreme Court of the United States ruled against the Environmental Protection Agency (EPA) and curtailed EPA’s regulatory powers by unprecedentedly invoking the “major questions doctrine” in its judgment of West Virginia v. EPA in 2022. We find that stock prices of firms with greater exposure to climate risk increased relative to firms with lower exposure after the Supreme Court verdict. The results are more pronounced for firms subject to higher federal climate enforcement intensity prior to the court ruling. Long-term zero carbon commitment by local government and environmental consciousness of institutional investors can mitigate the effect. Overall, our findings from this landmark climate litigation suggest that climate transition risks can affect stock prices.