This paper studies the asset pricing implications of industrial pollution. A long-short portfolio constructed from firms with high versus low toxic emission intensity within an industry generates an average annual return of 4.42%, which remains significant after controlling for risk factors. This pollution premium cannot be explained by existing systematic risks, investor preferences, market sentiment, political connections, or corporate governance. We propose and model a new systematic risk related to environmental policy uncertainty. We use the growth in environmental litigation penalties to measure regime change risk and find that it helps price the cross section of emission portfolios' returns.PRIOR FINANCE RESEARCH SHOWS THAT consumption and production influence expected stock returns. Little is known, however, about the role of their by-product-industrial pollution-in asset pricing. On the one hand, polluting firms may save costs by not investing in emission abatement and environmental recovery in the short run. On the other hand, the negative

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