Does China’s emission trading scheme affect corporate financial performance

Taking China’s Emissions Trading System (ETS) pilots as a quasi-natural experiment, we examine how the ETS affects firms' financial performance. Previous studies highlight the impact of ETS on regional and industrial development, however, few studies focus on its potential impact on firms’ performance. Using a time-varying difference-in-differences model and data on Chinese listed firms from 2008 to 2020, we find that the ETS pilots have significantly positive impacts on firms’ profitability and value, and a negative impact on operating costs. We also find that the ETS pilots improve total factor productivity but the changes in technology have an indirect suppressing effect on the relation between the ETS and financial performance. Finally, we find evidence that state-owned enterprises experience more significant improvements in their financial performance, led by ETS participation. Our findings have policy implications for firms’ sustainable development and the transition to a low-carbon economy.