Unraveling the nexus between emissions trading and corporate carbon outsourcing: Evidence from a quasi-natural experiment in China

This paper investigates the causal impact of the emissions trading scheme (ETS) on corporate carbon outsourcing by exploiting a quasi-natural experiment afforded by the implementation of carbon emissions trading pilots in China. Leveraging a novel dataset that links Chinese listed companies to their product-level imports between 2000 and 2016, we develop a measure of firm-level carbon outsourcing based on the carbon intensity of each product category and the firm’s import structure. Employing a triple-difference (DDD) estimator, we find robust evidence that the ETS leads to a significant increase in carbon outsourcing. We postulate that this effect operates through the internalization of environmental externalities, which raises production costs and incentivizes firms to outsource carbon-intensive processes to unregulated regions. Further analysis unveils heterogeneous responses across firms with varying green innovation capabilities, product mixes, and financial constraints, shedding light on the mechanisms that drive firms’ strategic adaptations to environmental regulations. Our findings highlight the unintended consequences of emissions trading in a globalized world and have important implications for the design of environmental policies in the era of climate change.