An Efficiency Perspective on Carbon Emissions and Financial Performance.

International policy actions to constrain carbon emissions create substantial risks and opportunities for firms. In particular, production processes that are relatively high emitting will be more sensitive to the uncertain costs of emitting carbon dioxide and might further reflect productive inefficiencies. We employ a productive efficiency model to evaluate firms' carbon emission levels relative to those of best-practice (efficient) peers with comparable production structures. By accounting for total factor productivity and sector-relative performance aspects, this measure of carbon efficiency helps to quantify and rank firms' relative dependence on carbon in the production process. We investigate the impact of carbon efficiency on various financial performance outcomes and evaluate the role of general resource efficiency in explaining these impacts. Using an international sample of 1572 firms over the years 2009–2017, we find superior financial performance in carbon-efficient (best-practice) firms. On average, a 0.1 higher carbon efficiency is associated with a 1.0% higher profitability and 0.6% lower systematic risk. While carbon efficiency closely relates to resource efficiency, it also has distinct financial performance impacts, particularly lowering systematic risk. Overall, our findings suggest that carbon-efficient production can be valuable from both operational and risk management perspectives. • Firms producing relatively abundant carbon emissions may be more sensitive to uncertain carbon costs and exhibit resource use inefficiencies • We estimate carbon efficiency in a joint production framework and investigate its relationship with financial performance outcomes • Carbon efficiency reflects the extent to which minimum feasible carbon emissions are generated in a given production structure • We find superior operating performance and lower systematic risk levels in carbon-efficient (best-practice) firms in the period 2009–2017 • Carbon efficiency can partly be regarded as 'Resource efficiency in disguise' [ABSTRACT FROM AUTHOR]