Porter in China: A quasi-experimental view of market-based environmental regulation effects on firm performance

Abstract

This paper exploits a natural Market-based Environmental Regulation (MER) experiment (the 2007 Sulfur dioxide (SO2) Emissions Trading Pilot (ETP) of the 11th five-year plan (FYP)) to assess the empirical relevance of the Porter hypothesis in the context of Chinese firms. MER effects on firms' emissions intensity and innovation performances are quantified by combining a unique sample of 3,198,000 individual firms (including >516,126 SO2 emitting plants) with a Propensity Score Matched Difference-in-Differences (PSM-DID) quasi-experimental framework over the 2001–2014 period. Empirical results show how ETP significantly reduces plant-level SO2 emission intensity while incentivizing polluters to effectively innovate, thus locally reconciling economic and environmental objectives. Findings are robust to replacement variables, restricted samples, parallel trend assumption, and placebo tests, indicating that effective policy and secular smooth time effects are individually captured. Further mechanistic tests suggest that MERs trigger green innovation behaviors of local governments and firms whereas the heterogeneity analysis confirms why large enterprises and regions exposed to strong environmental controls achieve emission reductions more effectively. Implications for global policy are proposed to systematize MER in future environmental planning.