Does cap-and-trade scheme impact energy efficiency and firm value? Empirical evidence from India

Governments worldwide have adopted environmental regulations to fight global warming. In 2012, the Government of India introduced the Perform, Achieve and Trade (PAT), a cap-and-trade scheme, to achieve energy efficiency for large-sized industries. The extant literature is divided on the impacts of environmental regulations on firm performance. While the win-win argument of Porter and Van der Linde (1991) proposes a positive effect, the cost-regulation theory suggests a negative impact. Against this backdrop, we examine the impact of the PAT scheme on energy efficiency and firm value. As an identification strategy, we employ difference-in-differences (DID) combined with propensity score matching methods on firm level data from 2006 to 2015. We do not find evidence of a statistically significant impact of the PAT scheme on firms' energy efficiency. In contrast, our results suggest that the scheme adversely affects firm value. Furthermore, we find that increased expenditure on repair and maintenance, research and development, rising plant and machinery purchases, and a fall in productivity are the potential channels through which the PAT scheme impacts firm value. Our results are robust to alternative definitions of energy intensity, firm value, and empirical specifications.