Background and Motivation
With climate change intensifying global demands for carbon reduction, market-based instruments like the Emissions Trading System (ETS) have become essential for countries seeking to balance economic growth with environmental responsibility. China, aiming for a low-carbon transition, launched ETS pilots in multiple regions beginning in 2013, eventually forming the world’s largest carbon market. However, the specific impact of these pilots on the cost of equity for high-carbon firms—and the roles played by regional economic development and firm characteristics—remains underexplored. China Finance Review International (CFRI) brings you a new article titled “ Carbon emissions trading system and the cost of equity for high-carbon firms ”, which systematically investigates this critical policy issue.
Methodology and Scope
This study exploits the staggered rollout of ETS pilots in China’s diverse regions, treating the policy as a quasi-natural experiment. Using a difference-in-differences (DiD) approach, the authors analyse a panel of A-share listed high-carbon firms across various industries (e.g., petrochemicals, power, aviation) from 2009 to 2018. The main variable of interest is the cost of equity, calculated via the CAPM model, while controls include firm and regional characteristics. Robustness checks employ alternative specifications, matching techniques, and subsample analyses to ensure the reliability of findings.
Key Findings and Contributions
Why It Matters
The study provides direct evidence that ETS, while advancing environmental goals, increases financing pressures for high-carbon firms, particularly those that are privately owned or financially constrained. This dynamic could hinder their green transition and overall competitiveness. For China—and other nations using emissions trading as a policy tool—the findings highlight the importance of tailoring regulatory and financial support to firm- and region-specific contexts to ensure that climate policy is both environmentally and economically sustainable.
Practical Applications
Discover high-quality academic insights in finance from this article published in China Finance Review International . Click the DOI below to read the full-text original! Open access for a limited time!
China Finance Review International
News article
Carbon emissions trading system and the cost of equity for high-carbon firms
5-Jun-2025