Carbon emission regulation, input-output networks, and firm dynamics: The case of low-carbon zone pilot in China
65 Pages Posted: 10 Jan 2022 Last revised: 27 Jun 2022
Date Written: June 27, 2022
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
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