Carbon Pricing and Corporate Investment Responses: Evidence from China’s Emissions Trading System

Abstract

Carbon pricing has emerged as a central policy tool for addressing climate change and advancing corporate environmental responsibility, yet its impact on firm-level investment and capital allocation remains insufficiently understood, particularly in emerging economies. This study examines whether emissions trading systems (ETS) influence corporate investment behavior and the reallocation of capital, using China as a representative case within the Asia-Pacific region. Employing a panel dataset of 5000 Chinese listed firms (approximately 80,000 firm-year observations) over the 2008–2023 period and a difference-in-differences framework, we identify the causal effect of carbon pricing on corporate investment decisions. The results show that firms exposed to carbon pricing experience a statistically significant reduction in investment following policy implementation. This effect is more pronounced in high-emission industries and operates through declines in profitability and tighter financial conditions. Asset-weighted measures indicate that the adjustment is concentrated among larger firms, and industry-level analysis shows that reductions are disproportionately driven by high-emission sectors. This pattern of heterogeneous investment responses is consistent with carbon pricing influencing investment allocation across firms; however, we do not directly observe the subsequent destination of capital or whether reduced investment in exposed firms is transferred toward cleaner activities. These findings provide new micro-level evidence that carbon markets shape corporate environmental management and real economic decisions by altering firm incentives, cost structures, and expectations. The study contributes to the literature by linking environmental policy tools to firm-level investment behavior and offers practical insights for policymakers and managers navigating the low-carbon transition in emerging economies.