The impact of emissions trading system on corporate energy efficiency: Evidence from a quasi-natural experiment in China

Abstract

This study investigates the effects of market-incentive environmental regulations on corporate energy efficiency. Using the SO2 emissions trading system in 2007 in China as a quasi-natural experiment, we employ the difference-in-difference-in-differences approach based on Chinese firm-level data from 2003 to 2010, and empirically examine whether the emissions trading system in China has achieved a win-win situation between environmental effects and energy efficiency. The results show that the implementation of the emissions trading system does improve the energy efficiency of firms. A plausible mechanism appears to be the strengthening of front-end prevention of firms, through which firms reduce their usage of primary energy to transform energy structure, thus improving their energy efficiency. The heterogeneity analysis shows that the results are more pronounced for private and export-oriented firms, firms with larger sizes, firms in the lifecycle of maturity or decline and firms that are capital-intensive. This study provides clear implications by shedding light on the effects of market-incentive environmental regulations on energy efficiency.