The impacts of China's ETS on firm competitiveness: Evidence from the power and heat production sector

Greenhouse Gas (GHG) emissions are one of the primary causes of climate change. In the coming decades, the economic costs of climate change are estimated to be 10 % of the global GDP. To mitigate threats of the catastrophic consequences of climate change, an Emission Trading Scheme (ETS) is proposed as a cost-efficient carbon pricing approach to reduce the GHG emissions from production activities. Since 2013, the Chinese government has launched seven pilot ETS projects. In the pilot projects, China established the national carbon trading market in 2021. The national ETS project covers more than 2000 power and heat production plants, which account for 40 % to 50 % of China's industrial emissions and 10 % of the worldwide GHG emissions. Despite the rapid expansion of China's ETS is, there is no consensus on the effectiveness or impacts of ETS. This study investigates the impacts of the pilot ETS on the competitiveness of the participating firms, measured by profitability, production investment, and environmental performance with a Difference-in-Differences (DID) method. Our study finds that the pilot ETS had a positive impact on profitability and GHG emissions reduction among the participating firms, and a negative impact on production investments. This study provides evidence that the pilot ETS has been effective in producing incentives for firms to reduce their emissions, which is not only beneficial to the environment, but also enhances firm's profitability.