Carbon Leakage within Firm Ownership Networks

This paper provides causal evidence on a within-conglomerate channel of carbon leakage under China’s regional pilots of the Emission Trading System (ETS). Our analysis leverages firm-level tax records linked to detailed ownership networks and exploits the quasi-experimental nature of the ETS rollout. We find that regulated firms reallocate production and emissions to unregulated sister entities within the same ownership network, leading to a 10.2% increase in carbon emissions among unregulated subsidiaries. This estimate provides a lower bound on the total leakage induced by China’s ETS pilots. We further show that leakage is concentrated in low-emission firms, occurs primarily under mass-based allocation, and is more pronounced in regions with lower regulatory risk. Taken together, the results highlight the importance of accounting for corporate ownership structures when designing and evaluating carbon pricing policies.