Reducing carbon emissions at the expense of firm physical capital investments and growing financialization? Impacts of carbon trading policy from a regression discontinuity design

Abstract

This study examines the effects of China's carbon trading policy on firm emissions and explores its impact mechanisms through financial and physical asset investments. The empirical analysis utilizes a fuzzy regression discontinuity design based on a sample of 427 industrial firms in China between 2014 and 2019. The results indicate that China's carbon trading policy incentivized firms to increase their financial investments while simultaneously discouraging physical capital investments. These shifts in investment patterns helped firms achieve their emission reduction targets. The study reveals that carbon trading policy in China has contributed to the financialization of firms, resulting in the erosion of firm assets and a decline in their overall competitiveness. Based on these findings, some policy recommendations are put forward.

Keywords: ETS; Environmental regulation policy; Investment decision distortion; Policy effect evaluation; RDD; Real capital accumulation.