Can China's carbon trading policy improve the profitability of polluting firms: a retest of Porter's hypothesis.

Abstract

The future trends and development trajectory of China's carbon emissions trading scheme (ETS), one of the key policy instruments for curbing peak carbon emissions and achieving carbon neutrality, have drawn a lot of interest. However, the Porter hypothesis (PH) and its validity boundary have not been explored sufficiently. We use micro-firm data from 2010 to 2019 to investigate whether the triple-difference (DDD) method could reveal the weak PH on the policy viewing ETS as a quasi-natural experiment in this work. Meanwhile, we use the panel threshold model and the moderated mediation effect model to assess the scientific border of the PH on the ETS. The findings show that by verifying the weak PH, the ETS may greatly enhance investment and foster the inventiveness of heavy-polluting industries (HPE). In contrast, the strong PH on the ETS has unstable validity and has non-linear characteristics. In particular, the ETS shows a U-shaped link between innovation and profitability by first decreasing and then increasing HPE's profitability through R&D. The cost of R&D and compliance costs being combined negatively impacts HPE's profitability. Further analysis shows that ETS will have different effects on the profitability of HPE due to R&D level and the threshold change of the compliance cost. This paper will offer some insightful points of view for the implementation of carbon market mechanisms in developing nations like China.