Will regulated firms benefit from carbon emission trading system? Evidence from a Market Power Perspective.

Abstract

The impact of the carbon emission trading system (ETS) on firms' market competitiveness has been a controversial issue with no consistent theoretical conclusions. The aim of this paper is to explore the impact of the carbon emission trading system on firms' markups using the latest robust staggered difference-in-difference estimation method. The results show that China's carbon emission trading system greatly contributes to the enhancement of firms' market power, as evidenced by a series of robustness tests. In addition, the analysis of the impact mechanism shows that the carbon emission trading system enhances the market power of firms through the low-carbon innovation effect and the market integration effect, while the impact of the environmental cost effect is not obvious. Moreover, the heterogeneity analysis shows that the impact of China's carbon trading system policy on firms' market power is more pronounced, especially for those firms that are actively involved in low-carbon transformation and upgrading, have a stronger cost-shifting capacity, and are more efficient in production. This study provides empirical evidence on how environmental regulations affect firms' market power and offers theoretical guidance for the construction of China's carbon market.