Real Effects of Carbon Emission Trading System: Evidence from Tradable Performance Standard

We investigate the real effects of carbon emissions trading system (ETS) on firms' production inputs, i.e. investment and labor, based on a staggered difference-in-difference (DiD) model using the quasi-natural experiment of China. The empirical results show that firms would invest more and hire more after being covered by ETS pilots, and heterogeneity analysis reveals such boost is mainly driven by the zero-carbon and clean energy projects and the enlarged population of unskilled workers (production workers). We provide potential economic mechanisms that the unconventional rate-based tradable performance standards (TPS) may lead to increasing in investment. Firms with higher investments and state-owned enterprises are more likely to expand their employment because of the demand for operating newly established facilities. Furthermore, the cost of expanding investment and employment is primarily reflected as individual loss (lower salaries per capita), while it does not deteriorate firms' productivity, efficiency and firm value. These findings deepen our insights into the effects of an unconventional rate-based ETS on firm behavior and efficiency in a developing economy.