Carbon emission regulation, input-output networks, and firm dynamics: The case of low-carbon zone pilot in China

Abstract

We provide the first theoretical and empirical study on how the carbon emission regulation affects firm dynamics, including entry, exit, and innovation. Using a difference-in-difference-in-differences empirical strategy, we find that the policy leads to less entry and exit, but more innovation, in the carbon-intensive sectors; more entry, exit, and innovation, in the downstream sectors; less entry, exit, and innovation, in the upstream sectors. These facts can be rationalized by a firm-dynamics model with input-output linkages. Estimates of the model and policy experiments inform the policy-makers that the effects of carbon policy may be mis-measured if overlooking input-output linkages.

Keywords: carbon policy, firm dynamics, innovation, input-output network

JEL Classification: C15, D21, D22, E23, Q56