The Cost of Carbon: Negative Stock Market Reaction to China’s Carbon Emission Trading (CET) Market

Mingyuan You and Xiaobo Liang
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Mingyuan You: Hebei Provincial Party School of the Communist Party of China, Shijiazhuang, China
Xiaobo Liang: University of Nevada, Las Vegas, Las Vegas, Nevada, United States

Financial Economics Letters, 2025, vol. 4, issue 2, 30-39

Abstract: On July 16, 2021, China launched its national carbon emission trading (CET) market, with initial participation limited to firms in the power sector. This study examines the stock market’s response to this policy change. Results show that power sector firms recorded stock returns approximately 2% to 4% lower than those of other firms in the immediate aftermath of the CET market’s introduction, with the difference being statistically significant at the 1% level. The effect is particularly pronounced for firms located in regions with limited energy transition capacity. Using a difference-in-differences (DID) framework, we also find that power sector firms experienced declines in profitability and increases in operating costs, providing a plausible explanation for the observed market reaction.

Keywords: CET Market; Stock Market; Energy Transition; Green Finance (search for similar items in EconPapers)
Date: 2025
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