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 in low-carbon zone pilot cities, in carbon-intensive sectors, and after the policy is implemented, there are significantly less entry and exit, but more patent applications related to energy efficiency. The effects of the regulation diffuse in the input-output networks. In the downstream sectors of the carbon-intensive sectors, there are more entry, exit, and environment-related patent applications; in the upstream sectors, there are less entry, exit, and patent applications. These facts can be rationalized by a firm-dynamics model with input-output linkages.

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

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