How to achieve both environmental protection and firm performance improvement: Based on China's carbon emissions trading (CET) policy

Based on panel data drawn from the Annual Survey of Industrial Firms (ASIF) in China spanning 1998 to 2013, this study assesses the micro-level effects of China's CET policy, reexamining the classic dilemma of balancing “environmental protection and economic growth”. The findings reveal that within the pilot industries, the CET policy leads to lower output and value-added for firms in the pilot regions. This can be attributed to the fact that firms in these regions have not notably increased their independent innovation or adopted imported digital products (technology). However, firms with higher initial productivity levels will benefit, as they engage in more independent innovation, effectively triggering the “Porter Effect”. Furthermore, the discussion highlights the heterogeneous impact of CET, and resulting performance divergence within the industry. The failure of inefficient enterprises to exit promptly and the inability of potential entrants to join in a timely manner, lead to suboptimal resource allocation, which lies at the core of the challenge in balancing environmental protection and economic growth. Additionally, the study reveals that China's CET policy significantly contributes to an increase in the value-added rate, signifying a transformation in the economic growth pattern and a natural alignment between environmental protection and economic growth.