The Impacts of Carbon Pricing on Firm Competitiveness: Evidence from the Regional Carbon Market Pilots in China

Abstract

We examine the impacts of China’s unconventional emission trading system (ETS), a rate-based tradable performance standard (TPS), on firm competitiveness. Our analysis takes advantage of the quasi-natural experiment created by China's regional ETS pilots and firm-level data on innovation and financial performance. We find that ETS directs firm innovation towards climate technologies, increasing low-carbon patents by 75 percent. Allowance trading and price play an instrumental role in improving the intensity and quality of innovation. Furthermore, we find no evidence that ETS harms firm profitability, which can be explained by the induced innovation helping mitigate the cost of compliance with ETS.

Keywords: Emission Trading System, Innovation, Firm Competitiveness

JEL Classification: L51, Q55, O3