Does Emissions Trading Scheme Induce Innovation and Carbon Leakage? Evidence from Japan

Guanyu Lu (), Taisuke Sadayuki () and Toshi Arimura
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Guanyu Lu: Graduate School of Economics, Waseda University
Taisuke Sadayuki: Faculty of Economics, Seijo University

No 2217, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: This study aims to explore if Japan’s environmental regulation, such as its regional emissions trading scheme (ETS), can improve innovation without inducing carbon leakage. Using unique firm-level data for the period from 2003 to 2018, based on the difference-in-differences method, this study investigates how firms address issues such as innovation and outsourcing under Japan’s regional ETS framework. The key findings are as follows. (1) Japan’s regional ETS is effective in improving targeted firms’ innovation during the early stage of the compliance period. (2) Targeted firms that pursued innovation before the ETS promoted subsequent innovations after the ETS. (3) Japan’s regional ETS did not induce the risk of carbon leakage through outsourcing activities. (4) Firms that did not actively encourage innovation increased their outsourcing activities during the compliance period. Based on these findings, we discuss the study implications and directions for future policy design.

Keywords: Emissions trading scheme; Japan; innovation; carbon leakage; outsourcing activity; difference-in-differences (search for similar items in EconPapers)
JEL-codes: Q48 Q50 Q55 Q56 Q58 Q59 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2023-03
New Economics Papers: this item is included in nep-ene, nep-env, nep-int, nep-sbm and nep-tid
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