The optimal design of environmental instruments demands a balance between environmental enhancement and economic growth. Utilizing microdata from the China Environmental Statistics Database and the China Industrial Firm Database, this study employs the difference-in-differences (DD) methodology to explore the dual effects of the SO₂ Emissions Trading Scheme (ETS) on the environmental and economic performance of micro-firms. The findings suggest that: (1) The SO₂ ETS not only induces emission reduction effects among firms in pilot areas but also improves their industrial added value. (2) The SO₂ ETS exhibits heterogeneous impacts across firms of diverse ownership, export status, and size. (3) While the SO₂ ETS prompts firms to advance technologically, boosting desulfurization capacities and subsequently enhancing total factor productivity, it also inadvertently results in companies offsetting some environmental compliance costs by curtailing employee wages.
Keywords: Difference-in-differences; Economic performance; Emissions trading scheme; Environmental performance.
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