The participants at the United Nations Climate Change Conference (COP27), in the spirit of the UK Glasgow Convention, are trying to develop further action plans to speed up the mitigation of global warming and encourage sustainable development (United Nations 2022). In the last two centuries since the advent of industrialization, people around the globe have never been confronted with such a major environmental issue as today in the 21st Century, and the world has never given as much focus to the reduction of carbon emissions (Liu and co. 2022). Carbon policies are now at the forefront of global efforts to cut carbon emissions, which could lead to significant costs and the stranding of billions of dollars of carbon assets for firms that are the major source of carbon dioxide emissions. Based on the research, it appears that the implementation of carbon-related policies has largely impeded corporate financing, pushed up the costs of bank lending (Ren and Co. 2023), and had a significant negative effect on the company’s environmental performance, ESG performance, and the value of its corporate assets (Yang 2023 and Liu and others. 2021). The need to be able to adjust to the threats posed by ever-more stringent carbon policies is now the top priority for companies to survive (Shu and Tan, 2023).

Numerous researchers have already assessed the effects of carbon policy. Regarding positive results, carbon policy implementation can help reduce the climate-related risks for both government and businesses in turn while simultaneously increasing the green performance and social responsibility of companies (Yi-Shuai and co., 2023; Jinhua Cheng al., 2019). 2023, Jinhua Cheng et al. 2019). In regards to negative impacts, carbon policies can increase the costs of financing debt for companies. Funding costs for debt and, when companies have less technical efficiency, their performance in business is more affected by the carbon policy’s implementation (Yang et al. 2021). The more the carbon policy is, the more negative the effect on companies’ returns on assets (Waqar Wadho et al. 2018). Research that studies corporate risk-taking is more than usual, as at the macro-level and uncertainty in the trade policy and economic policy, air pollution could impact risk-taking in the corporate sector (Jie Wang et al., 2023; Huy Viet Hoang et al., 2023; Huy Viet Hoang et. 2023) however, the executive incentive could mitigate this negative effect as well as at the micro-level investors’ micro-level the decisions of investors as well as analysts’ forecasts the cash reserves of firms are also determining the extent of risk-taking (Magerakis and Conrado, 2023). 2023, Conrado and Conrado. 2023).

This paper analyzes the effect of carbon policy implementation risk-taking by corporations for the following reasons. First, risk-taking, which is an essential element of financial decision-making in corporate finance, can have a profound impact on capital accumulation in the corporate sector as well as enhancing competitive advantages over time as well as sustainable operation. In the context of exposure for corporate investors to risks posed by carbon policies from outside studies, the impact of carbon policy implementation risk-taking in the corporate world is very limited. Additionally, China offers an ideal research that is a quasi-natural one. Since it is an important carbon emitter, the Chinese National Development and Reform Commission (NDRC) launched its Low Carbon City Pilot (LCCP) in the year 2010 in three different batches. The initial batch comprised five provinces and eight cities. The second batch was launched in 2012 and included one town and an area, and the third batch was launched in 2017 with 45 cities. The principal goal for the LCCP is to increase low-carbon consumption and production as well as to establish a low-carbon economic system in cities and assist in the transition to a low-carbon economy of businesses (Lyu et al., 2023).In nearly a decade of growth, this LCCP strategy has grown into one of the most important strategies to encourage the green economy in China (Liu et al. 2021).

The theoretical framework for this study is founded on the following factors. The introduction of a carbon policy sends an environmental signal to the markets for financial services and draws the attention of investors from corporations. The carbon bubble will be susceptible to bursting as investors begin to realize that the value of their corporate stock will likely decline because of the carbon policy risk (Dong and Yoon, 2023). If a company is experiencing negative feedback on performance, The level of corporate risk-taking is likely to decline since actual performance falls short of expectations (He and Co., 2023). Furthermore, with the policy’s implementation, businesses tend to make more prudent investment choices to mitigate the increased exposure to financial restrictions imposed by carbon policies, thus the impact of carbon policy on the risk-taking of corporate investors (Mclean and Zhao 2014).

This study uses a double/debiased machine learning method based on difference-in-differences to investigate the relationship between carbon policy implementation and corporate risk-taking, as corporate risk-taking is susceptible to the influence of covariates such as corporate characteristics and industry development. The advantage of this approach is that it eliminates the bias that is inherent in the use of secondary models of machine learning in additional equations that could destroy the burden of dimensionality due to the excessive number of variables used in linear regression and increases the accuracy of the estimation by employing the nonparametric machine-learning model to handle nonlinear relationships without determining the relationship between variables (Chernozhukov and co. 2017). Our results suggest that carbon policy implementation dramatically reduces risk-taking by corporations and that investor fears, as well as financing restrictions, are important factors that carbon policy implementation can impact the risk-taking of companies. The results remain as they are after the tests for robustness are completed.

The major contribution of this paper is one of the most important: this study incorporates carbon policies in the analysis framework of financial decision-making in the corporate sector. It shows the negative effect the carbon policies’ implementation has on risk-taking by corporations and risk-taking, which expands the understanding of the macroeconomic effects of carbon policy. It also complements the studies related to both the risk of carbon policies and risk-taking by corporations. Furthermore, this paper employs an innovative approach to empirical research and demonstrates debiased and effective treatment effects, making the research findings more trustworthy.
The remaining parts of this research are in the following order: Section 2 outlines the design of the sample as well as the descriptive statistics; Section 3 provides the results of an empirical study; Section 4 provides the analysis of the mechanism; Section 5 presents the test for heterogeneity; and Section 6 lays out the conclusion.