Carbon Emission Trading System and Firm Dynamics in China

66 Pages Posted: 6 Apr 2022 Last revised: 26 Jul 2022

See all articles by Xiangyu Shi

Xiangyu Shi

Yale University, Department of Economics

Chang Wang

Fudan University

Date Written: July 25, 2022

Abstract

This paper studies how the carbon emission trading system (ETS) pilot policy announced in 2011 affects firm dynamics, including entry, exit, and innovation. Using a difference-in-difference-in-differences empirical strategy, we find that in pilot cities, in targeted sectors, and after the policy is announced, there are significantly less entry and exit, but more patent applications related to energy efficiency. The positive effects on the patent applications are more pronounced in larger and older firms. The effects of the regulation diffuse in the input-output networks, leading to more patent applications in upstream and downstream sectors. These facts can be rationalized by a firm-dynamics model with input-output linkages. We calibrate the model using simulated method of moments (SMM) and conduct a policy experiment. The positive effects of ETS on growth and welfare are amplified in the presence of input-output networks.

Keywords: emission trading system, firm dynamics, energy efficiency, input-output linkages

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

Suggested Citation

Shi, Xiangyu and Wang, Chang, Carbon Emission Trading System and Firm Dynamics in China (July 25, 2022). Available at SSRN: https://ssrn.com/abstract=4058779 or http://dx.doi.org/10.2139/ssrn.4058779

Xiangyu Shi (Contact Author)

Yale University, Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Chang Wang

Fudan University

600 GuoQuan Road
Shanghai, 200433
China

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