China’s emissions trading scheme, firms’ R&D investment and emissions reduction

As the world’s largest energy consumer and carbon emitter, China accounts for approximately one-third of global carbon dioxide (CO2) emissions. Launched in 2021, China’s national emissions trading scheme (ETS) has become a well-established market-based instrument in the country’s efforts to peak CO2 emissions and achieve carbon neutrality. This study, viewed as a quasi-natural experiment, examines the impact of China’s ETS pilots. We evaluate the carbon emissions reduction effects and associated mechanisms of China’s pilots using a propensity score-matched difference-in-differences model (PSM-DID) and Chinese State Administration of Tax (SAT) data. The findings show that the ETS pilots have led to a 4.3% and 7.5% reduction in the carbon emissions intensity and total carbon emissions of firms, respectively. Firms in the ETS pilot regions reduce carbon emissions and intensity mainly by increasing firms’ willingness and investment in R&D. Further investigation reveals heterogeneity in carbon emissions reduction among firms of different sizes, leverage ratios, and ownership. The findings suggest that in order to fully realize the emissions reduction potential of the ETS pilots, the government should expand the range of entities covered and improve the liquidity of the carbon market.