This study investigates the influence of economic growth on CO2 emissions levels in three developed countries—Argentina, Equatorial Guinea, and South Korea—based on their status as high-income countries. We test the environmental Kuznets curve (EKC) hypothesis using the time series approaches to check the relationship and direction of causality among the variables over a sample spanning 1974–2020. The results show an inverted U-shaped short-run relationship in all three countries. In the long run, only South Korea supports the EKC hypothesis. Further, Granger causality results indicate the existence of causality. These long-run causal relationships between economic growth and emissions recommend one policy implication that wealthy governments must expand investments in renewable clean energy projects and R&D, with regulatory measures to suppress harmful environmental procedures and support environmentally friendly development.

In this study, I extend the Fama and French five-factor asset pricing model with a sixth factor, namely, carbon risk, to investigate its impact on equity returns. To measure carbon risk, a new factor ‘pollutant minus green,’ is developed using the difference between the weighted average returns of pollutant and green firms across 51 developed and emerging countries across four categories—North America, Europe, Emerging Markets, and the Asia Pacific. The results reveal that North America, Europe, and Asia Pacific markets have a carbon risk premium that gets eliminated in small-cap firms. The carbon risk factor is further tested in left-hand side (LHS) test asset portfolios and found to be more pronounced with size-effect anomaly; specifically, small stock firms report greater declining average returns because of more exposure than the mega-cap stocks to carbon dioxide emissions. Furthermore, size-effect anomaly prevails with profitability and investment factors across firms. Therefore, high profitability, as well as high investment small firms, show a greater decline than the big stock firms in average returns when their carbon dioxide emissions increase. The asset pricing model evaluation is carried out through the Gibbons, Ross, and Shanken test. The six-factor model directed at capturing carbon risk patterns in average equity returns performs better than the three-factor and five-factor models of Fama and French (1993 and 2015) in the majority of categories under 3x3 sorting and compete with both Fama and French model under 2x4x4 sorted LHS portfolios. The finding of this study offers various useful applications for investors, policymakers, brokers, corporations, governmental pollution abatement institutions, and other stakeholders who wish to obtain carbon risk premium.