The impact of ETS on productivity in developing economies: A micro-econometric evaluation with Chinese firm-level data

An emission trading system (ETS) is a market-based tool for reducing emissions. Pricing carbon dioxide (CO₂) emissions could impose additional costs on regulated firms, thus hindering their competitiveness. Prior literature has focused on ETS's economic impact in developed economies, especially the EU ETS. However, the impact of ETS on firms in developing economies is still unclear. Here, we examine the causal effect of CO₂ ETS on the labour productivity of firms in China. We use, for the first time in this research context, a recently released firm-level panel dataset coupled with a variety of estimation techniques, such as a time-varying difference-in-difference model and a plethora of non-parametric matching approaches. Across all our estimation strategies and using two distinct datasets, we find no evidence in support of the suggestion that ETS will diminish the competitiveness of regulated firms. Our results provide significant evidence in favour of the strong Porter hypothesis, namely that ETS will boost the productivity of participating firms in China. Furthermore, we demonstrate that the beneficial impact of ETS is concentrated on relatively smaller and younger firms. In policy terms, these results illustrate that market-based environmental tools can reduce pollution while simultaneously boosting the competitiveness of small and new firms in a developing economy.