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Carbon price dynamics and firm productivity: The role of green innovation and institutional environment in China's emission trading scheme

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  • Gong, Junjiao
  • Qiu, Xuan
  • Fang, Jiaqi

Abstract

The commodity and financial attributes of carbon emission allowances play a pivotal role within the Carbon Emission Trading Scheme (CETS), with carbon prices directly reflecting the underlying value of these allowances. This study employs a Difference-in-Differences (DID) model using data from publicly listed Chinese firms over 2010–2023 to examine the effects of carbon price levels and stability on total factor productivity (TFP). Results indicate that increases in both carbon price level and stability enhance TFP, particularly among heavy-polluting and non-state-owned enterprises. Mechanism analysis shows that higher prices and stability stimulate corporate engagement in green innovation, trigger the Porter effect, and thereby further improve TFP. Furthermore, optimizing the system environment proves to be an effective means of strengthening the scheme's impact. The study also finds that allocating initial quotas via payment-based mechanisms offers a more effective design. The findings underscore the importance of reinforcing the financial attributes of carbon allowances and provide practical guidance for boosting trading activity and market liquidity.

Suggested Citation

  • Gong, Junjiao & Qiu, Xuan & Fang, Jiaqi, 2025. "Carbon price dynamics and firm productivity: The role of green innovation and institutional environment in China's emission trading scheme," International Review of Economics & Finance, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:reveco:v:104:y:2025:i:c:s1059056025007701
    DOI: 10.1016/j.iref.2025.104607
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