Does Carbon Pricing Outperform Command-and-Control Regulation? Firm-Level Evidence from Korea’s Dual Regulatory Framework

This study exploits South Korea's unique dual-policy framework to evaluate the comparative effects of carbon pricing and command-and-control regulation on firm-level environmental performance. Using a difference-in-differences design with firm-level panel data from 2011 to 2022, I compare outcomes between firms regulated under a command-and-control program (Target Management System, TMS) and those subject to a market-based carbon pricing mechanism (Emissions Trading Scheme, ETS). The results show that ETS-regulated firms reduced energy use by approximately 5.8% to 8.8% and carbon emissions by 7.3% to 8.5% across model specifications. However, the effects on carbon intensity were inconsistent. Event-study analyses suggest that these differing effects are driven by the heterogeneous timing of firm responses: immediate but short-lived reductions in energy use, persistent declines in carbon emissions, and gradual improvements in emissions efficiency. Phase-specific estimates further indicate that more market-oriented ETS phases were associated with stronger reductions in carbon emissions and intensity, underscoring the role of incentive-based policy design in enhancing environmental outcomes.