SO2 emissions trading and firm exports in China

The pollution haven hypothesis and Porter hypothesis provide two distinct views on the relationship between environmental regulation and exports. Our study aims to contribute to this debate by examining the impact on firm exports of China's SO2 emissions trading scheme (SO2 ETS), a market-based environmental regulation. By adopting a difference-in-difference-in-differences (DDD) estimation approach, we find that in more polluting industries, the SO2 ETS has a positive impact on firm exports. We investigate the mechanism behind this effect suggesting that SO2 ETS triggers firms to engage in more innovation activities, which subsequently leads to increased exporting performance. Heterogeneous analysis suggests that this positive effect is present only for non-state-owned enterprises (non-SOEs) and enterprises in more competitive industries. Moreover, we find that there is a lagged effect of the SO2 ETS on exporting performance, and the effect fades slowly over time. Overall, our findings support the strong version of the Porter hypothesis. We can cautiously conclude that the market-based environmental regulations could result in “win-win” outcomes for both economic growth and environmental protection.