Transition Risk in the U.S. Sunset Sectors

Abstract

Climate change presents an ongoing challenge, with the transition to a low-carbon economy becoming increasingly critical. Intensifying global efforts to decarbonize places a mounting transition risk on the carbon-intensive sunset industries, stemming from policy shifts, technological innovation, investor divestment, and increased pressure from stakeholders. This uncertainty poses a significant risk to economic stability, highlighting the urgent need to provide a comprehensive understanding of the transition dynamics within the sunset industries. Therefore, this paper aims to explore the insufficiently researched area of sunset industries under the current transition dynamics. Utilising the US’s market reflection of green policy developments, such as the Inflation Reduction Act, while exploring firms' readiness to innovate through green patent issuance. This paper focuses on 125 US sunset industry companies from 2016 to 2024, with the fossil fuel sector serving as the robustness check due to its deep-brown nature. The investigation utilizes a linear time series unbalanced panel, applying the fixed effect approach. The findings indicate the presence of a significant emission premium, suggesting that increased emission intensity is associated with increased risk, visible through heightened returns. Moreover, the enactment of the Inflation Reduction Act increased risk within sunset industries due to the policy benefiting sunrise industries. Green patents served as mitigators of risk, through decreased returns observed. Furthermore, the market valued changes in emission intensity more than IRA and green patent issuance, indicating the market's valuation to prevent greenwashing and lack of sustainable policy stability in the US, while firm-specific material sustainability efforts observed in emission intensity changes present higher value.