The impact of regulatory and financial discrimination on China's low-carbon development: Considering firm heterogeneity

Abstract

Firms in China within the same industry but with different ownership and size have different production functions and face different emission regulations and financial conditions, thus can give very different responses to environmental policies. This fact has been largely ignored in most of the low-carbon development related literature. Using an augmented Chinese input–output table in which information about firm size (large- and small and medium-sized firms) and ownership (state-, foreign-, and private-owned firms) are explicitly reported, a dynamic computable general equilibrium model is developed in this study to analyze the impact of alternative low-carbon policy designs with different regulatory coverage and financial equalization on heterogeneous firms. Our simulation results show that, with the fully balanced regulation coverage and equalized financial system for heterogeneous firms, the total green investment accounts for 4% of GDP in 2030 for fulfilling China's commitment to reduce carbon emissions, which is the lowest among the various scenarios; about one-third of this investment is made by small and private firms; at the same time, green investment efficiency will be the highest, about 84% higher than that of the business-as-usual level. Therefore, a market-oriented and new technology-driven arrangement and mechanism for sharing emission reduction burden and allocating green investment across heterogeneous firms, especially to small and medium-sized firms, is crucial for China to achieve a more ambitious emission target in the long run.