The Impacts of China’s ETS on Firm Competitiveness; Evidence from the Power and Heat Production Sector
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Date
2023-09-25
Authors
Zhang, Mingming
Journal Title
Journal ISSN
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Publisher
University of Waterloo
Abstract
Carbon emissions are one of the primary causes of climate change. In the coming decades, the economic costs to deal with climate change are estimated to be 10% of the global GDP. To mitigate the threats, Emission Trading Scheme (ETS) is proposed as a cost-efficient carbon pricing approach to reduce the CO2 emissions in industrial production. Since 2013, the Chinese government has launched seven pilot ETS projects, and successionally, in 2021, the national carbon trading market was established. The national ETS in China covers more than 2,000 power and heat production plants, which accounts for 40% to 50% of China's industrial emissions and 10% of worldwide carbon emissions. Even though the expansion of China ETS is rapid, there is a limited number of analyses on the effectiveness and impacts of ETS. This study aims to further the understanding of the impacts of China’s pilot Emission Trading Scheme (ETS) on firm competitiveness in the power and heat production sector. According to the market externality of environmental emissions and Resource Dependency Theory (RDT), the pilot ETS will inevitably affect the firms’ production and introduce uncertainties to their decision-making process. However, there has been no consensus for debates between the Compliance Cost Hypothesis and the Porter Hypothesis over the impact of environmental regulations on firms. Maintaining firms’ competitiveness in the sluggish market is critical after the COVID pandemic. Firms with better competitiveness are more attractive to external resources and show stronger resilience in a volatile environment. Governments are expected to roll out appropriate regulations to minimize the financial costs of regulations compliance and, meanwhile, guarantee effectiveness. Hence, it is essential to study and understand how ETS affects the firm competitiveness in seven pilot projects.
This study explores the firm competitiveness of participants in the power and heat production sector from the perspectives of firm profitability, production investment, and environmental performance. The data on Return-of-Assets (ROA), operating costs, and carbon emissions at the firm level have been collected from the China Stock Market & Accounting Research Database (CSMAR) and the Carbon Emission Accounts & Datasets (CEADs). The Difference-in-Differences (DID) method is employed for data analysis, and complete robustness tests are conducted to justify the validity of the study. The results indicate that implementing pilot ETS could increase firm profitability but reduce the production investment, and the environmental performance of the firms reveals that the pilot ETS has achieved emission reduction during the observation period without time lag. This study makes the following contributions to the current academic literature. First, it could serve as a micro-economic analysis of ETS impacts. Second, it compares different definitions of firm competitiveness and establishes a multi-dimensional measurement framework for analyzing the performance of high-carbon firms in the ETS. At the same time, the results may also help firms further understand the ETS regulations and build optimal strategies in the market. Finally, the study is also expected to support decision-making in regulation modification and stakeholder engagement in the future.