Carbon emission trading and green transition in China: The perspective of input-output networks, firm dynamics, and heterogeneity

Abstract

We (re)evaluate the general-equilibrium effects of (environmental) policies from the perspectives of input-output networks and firm dynamics and heterogeneity. Using China's carbon emission trading system (ETS) as an example, we find that ETS leads to more patent applications, especially the ones associated with low-carbon technologies in the target sectors, showing a trend of clean growth and green transition of the macroeconomy. The effects are mostly muted at the firm level due to selection effects, whereby only larger firms are significantly and positively affected. Meanwhile, larger firms occupy a small share in number but a large share of aggregate outcomes, contributing to the discrepancy between the negligible effects of ETS at the individual firm and large effects at the aggregate sector levels. The effects also diffuse in input-output networks, leading to more patents in upstream/downstream sectors, through the channels of demand/supply changes and knowledge spillovers. We build and estimate the first firm dynamics model with input-output linkages and regulatory policies in the literature and conduct policy experiments. ETS's effects are amplified given input-output networks.