Does emission trading system lead to reverse investment leakage: Evidence from Chinese listed firms

Abstract

Carbon leakage through investment caused by emission trading system (ETS) is of great concern because it would affect the emissions-reduction effects of ETS. However, the existing literature mainly focuses on the forward investment leakage caused by ETS but has not studied its reverse investment leakage. This paper constructs a theoretical model to reveal the influence and mechanism of ETS on the reverse investment leakage of unregulated pollution-intensive firms. We adopted the staggered difference-in-differences (DID) and difference-in-difference-in-differences (DDD) models to empirically test the research hypotheses proposed in the theoretical model, coupled with the firm-province-year level data from 2004 to 2021. We obtained the following results. First, Chinese regional emission trading systems (ETSs) reduce the number of new subsidiaries of unregulated pollution-intensive firms in the ETS areas by 35.5 %, causing significant negative reverse investment leakage. Second, the ETSs inhibit firm investment through two channels: emission cost and emission risk. Third, Chinese ETSs have a stronger investment inhibition effect on firms with higher profitability, firms with higher innovation input and small firms, as well as industries with lower carbon-intensity and industries with higher concentration. Fourth, the ETSs in Beijing, Shanghai, Tianjin, Guangdong, and Fujian have a significant investment inhibition effect, while the ETSs in Chongqing and Tianjin do not. It is suggested that Chinese ETSs and other ETSs in the world take full account of reverse investment leakage. Governments in China's ETS regions should formulate differentiated anti-leakage measures, incorporate more enterprises into carbon management, and actively improve green innovation capabilities in ETS regions.