Management Practices and Climate Policy in China

Abstract

Cap-and-trade program for CO2 emissions are being considered by governments worldwide to address the climate change challenge. The success of such a market-based climate policy at minimizing overall abatement cost and fostering low-carbon investment and innovation depends on participants fully understanding the trade-offs between using, selling or banking a permit. We provide the first empirical evidence on how management quality moderates responses to carbon pricing, by analyzing on firms that participated in two of China's regional pilot emissions trading schemes (ETS), located in the city of Beijing and Hubei province. We collect new data by interviewing plant managers or lead engineers at 216 randomly selected firms, and combine them with financial, patent and energy consumption data for each firm. We show that well-managed firms have on average higher productivity, which has been documented in previous research. In addition, low-carbon innovation measures elicited from managers are strongly positively associated with "green" patenting.These results strengthen the credibility of our interview data. We also investigate whether carbon trading affects energy use of regulated firms. We estimate that the launch of the pilot ETS in Beijing has reduced consumption of coal and electricity by treated firms relative to control firms, but this effect is statistically significant only for well-managed firms. Our estimates imply that the overall reduction in coal use following the introduction of the pilot ETS would have been four times smaller if firms with above-median managers had been managed by below-median managers.

Keywords: climate policy; firm behavior; management practices; emissions trading scheme; policy evaluation

JEL Classification: D22, O31, Q48, Q54