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 total leakage from the ETS pilots, implying that at least 19% of the emissions reductions achieved by regulated firms are offset through within-conglomerate leakage. We further show that leakage is concentrated in pilots regulating total emissions, while we find little evidence of leakage under pilots regulating emission intensity. Leakage effects are also stronger among low-emission firms and in regions with lower regulatory risk. Our results highlight that incomplete regulation can dilute policy effectiveness through leakage within ownership networks, suggesting the importance of accounting for corporate ownership structures when designing and evaluating carbon pricing policies.