Carbon Leakage within Firm Ownership Networks

This paper evaluates the carbon leakage of China’s regional pilots of emission trading system (ETS). Our analysis leverages firm-level tax records, ownership networks, and the quasi-experimental nature of the ETS pilots. We find that ETS-regulated firms shift production to their unregulated sister entities in the same ownership network, resulting in an 8.3% increase in carbon emissions from these unregulated partners. We also show that the leakage mainly occurs among low-emission firms, under the mass-based allocation rule, and in areas with low regulatory risks. Accounting for carbon leakage, the aggregate effect of China’s ETS pilots on firm emissions becomes statistically insignificant.