The Reallocation Effect of Emissions Cap-and-Trade: Evidence from China

Ohyun Kwon, Hao Zhao and Min Qiang Zhao ()
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Min Qiang Zhao: Xiamen University, Postal: MOE Key Laboratory of Econometrics The Wang Yanan Institute for Studies in Economics, Xiamen University
Authors registered in the RePEc Author Service: Min Qiang (Kent) Zhao

No 2021-13, School of Economics Working Paper Series from LeBow College of Business, Drexel University

Abstract: Under a heterogeneous firm framework, this paper demonstrates a novel channel through which emissions cap-and-trade mitigates production-side distortion vis-à-vis an emissions cap. Specifically, a pro rata emissions cap across firms is excessively stringent for more productive firms, leading to negative reallocation in favor of less productive firms. Allowing firms to trade emission permits restores the efficiency loss via positive reallocation without increasing total emissions. Our empirical investigation that exploits the regional and temporal variation in the implementation of cap and cap-and-trade policies in China shows that the emission intensities of more productive firms declined and then increased relative to those of their less productive counterparts following the sequential implementation of emissions cap and cap-and-trade, confirming our key theoretical prediction. Provinces that implemented emissions cap-and-trade achieved greater output growth while being equally effective in curbing total emissions.

Keywords: emissions cap-and-trade; heterogeneous firms; reallocative efficiency (search for similar items in EconPapers)
JEL-codes: L51 Q53 Q58 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2021-06-21
New Economics Papers: this item is included in nep-cna, nep-ene, nep-env and nep-res
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Persistent link: https://EconPapers.repec.org/RePEc:ris:drxlwp:2021_013

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