**1. Introduction**

As a market-oriented environmental regulation policy, the carbon emission trading (CET) policy internalizes the cost of carbon emission reduction of enterprises, which will be transmitted to the securities market and may affect the market value of enterprises. Based on the outcomes of some previous studies, a CET policy will lead to a reduction in an enterprise's market value [1–3]. Implementing a CET policy increases the production and operation costs of enterprises, which would crowd out their investment expenditure. This cost information is exposed to the capital market via corporate financial reports. This results in a reduction in the market value of enterprises. For example, Liu et al. (2021) showed that the implementation of carbon emission trading reduced the value of the current capital market. However, other studies have shown that the CET policy will enhance an enterprise's market value [4]. As carbon emission permits are freely allocated, the sale of the remaining permits could be accounted for by higher cash flows due to free permits, which would increase the market value of enterprises [5,6]. According to the price signals of carbon emission permits, some enterprises will adapt to the new direction of industrial development policy, increase investment in innovative activities, and conform to environmental legitimacy to improve their sustainable development ability, thereby enhancing their market value. In addition, certain companies with better carbon emission abatement performance and comparative advantages in terms of abatement cost

**Citation:** Tang, M.; Cheng, S.; Guo, W.; Ma, W.; Hu, F. Effects of Carbon Emission Trading on Companies' Market Value: Evidence from Listed Companies in China. *Atmosphere* **2022**, *13*, 240. https://doi.org/ 10.3390/atmos13020240

Academic Editors: Duanyang Liu, Kai Qin, Honglei Wang and Célia Alves

Received: 23 December 2021 Accepted: 28 January 2022 Published: 30 January 2022

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**Copyright:** © 2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

will provide detailed information disclosures to attract the attention of investors, thereby exerting a positive impact on the corporation's market value. As the effect of emission trading schemes (ETSs) on a company's market value is difficult to determine accurately, it is necessary to evaluate this effect thoroughly at the micro-level, especially for developing countries such as China.

After implementing a CET policy, a carbon emission permits market is established, wherein the equilibrium of supply and demand determines the price of carbon emission permits. The carbon emission permit price provides companies with a signal to choose between investing in emissions reduction or purchasing emission allowances on the carbon trading market. Accordingly, companies will invest in abatement until the marginal cost equals the CET permit price [7,8]. On the one hand, CET prices may affect enterprises' investment behaviors and expectations of investors, and these influences would be reflected in the stock market [9]. On the other hand, many companies involved in carbon emission trading can shift the carbon emission permit price to their product prices, thus influencing the return rate of their stock prices [10]. Accordingly, there is a strong link between the stock market and the carbon emission trading market [11]. Based on this price signal and its productivity, a company will decide whether to purchase carbon emission rights to meet the government's emission reduction requirements or reduce emissions per unit of output through innovation. First, companies with low productivity can only purchase carbon emission rights to meet the government's emission reduction requirements, which will bring compliance costs to the company and reduce its profits [12]. Carbon emission trading restricts the carbon emissions of these companies and increases the costs of emission reduction, compliance, and technology updates, thereby reducing the company's market value [13,14]. Second, companies with higher productivity can carry out innovative activities that meet the government's emission reduction requirements, and enhance product competitiveness and profits, thereby increasing the company's market value [12,13]. Therefore, there are many mechanisms by which EST affects the market value of companies, and it has a heterogeneous impact on companies with different productivities, which needs to be deeply explored.

As the world's largest carbon emitter, China actively seeks to promote carbon emission reduction through a carbon ETS. Since the European Union introduced the ETS in 2005, this policy has been widely adopted in the US, New Zealand, Australia, Japan, South Korea, and China [15,16]. The development and history of the international and Chinese CET markets are shown in Table 1. At the end of 2011, the Chinese National Development and Reform Commission (NDRC) issued a notice and authorized seven administrative areas at different levels of economic growth and industrial structure to pilot and build projects incorporating carbon emission trading [17]. The pilots cover all four province-level municipalities (Beijing, Shanghai, Tianjin, and Chongqing), two provinces (Guangdong and Hubei), and one special economic zone (Shenzhen) [18]. The preparation and launch of the seven ETS pilots were set to take place within three years (2011–2014) [19]. The seven ETS pilot projects were independently designed and operated, featuring a wide heterogeneity in economic and energy conditions in terms of population, income, the share of manufacturing, and energy consumption [18,20]. Thus, China's CET pilot initiatives offer an excellent opportunity for policy evaluation to investigate the impact of ETS on companies' market value.

Previous studies have extensively investigated the relationship between CET policies and the market value of enterprises. Many studies have investigated the impact of CET policy on enterprises' market value from the perspective of cost and innovation effects, but they obtained contradicting results. Studies from the perspective of the cost effect showed that the impact of CET policy on enterprises' market value is negative. On the contrary, studies from the perspective of innovation effects showed that the impact of CET policy on enterprises' market value is positive [5,10,21]. Furthermore, many studies have explored this effect from the perspective of the transmission effect of the carbon emission permit price. Flora and Vargiolu (2020) confirmed that the carbon price stability mechanism in

the European Union (EU) ETS significantly affects the timing of investment decisions and helps reduce investment related to carbon emissions [18]. Brouwers et al. (2016) found that following the EU's carbon verification, the capital market had a significantly negative response to companies whose carbon emissions exceeded their quotas [22]. Some studies showed that EU allowances price changes and stock returns of the most important European electricity corporations are positively related [1,2]. In addition, many other studies have examined the relationship between the carbon price and the stock returns of the electricity market. Ji et al. (2017) believed that there is strong information interdependence between carbon price returns and electricity stock returns, evidenced by a high total connected index [23]. Veith et al. (2009) measured the economic consequences of ETS using investors' expectations regarding the regulatory impact of firm value. They showed that returns on the common stock of the power generation industry are positively correlated with rising prices for emission rights [2]. However, little is known about the internal mechanism by which the ETS influences companies' market value. To address this research gap, we explore the influence mechanism of ETS on companies' market value by taking the CET pilot policy as a natural experiment.

**Table 1.** The development of history of international and China's CET market.


This study aims to investigate the effect of the CET policy on companies' market value and explore the influential mechanism. Exploring this influence effect and mechanism is conducive to realizing the synergistic effect of economic growth and carbon mitigation for policymakers in China and potentially other developing countries. Our study's contributions are the following: (1) we systematically evaluate the CET policy's influence on companies' market value and explore the influential mechanism; (2) we employ the difference-in-difference (DID) method to account for unobserved trends in the CET policy's effect on companies' market value across pilot and non-pilot regions. In addition, we select the study sample from listed companies on China's Shanghai and Shenzhen stock exchanges.

The remainder of this paper is organized as follows: the Section 2 provides a theoretical foundation. The Section 3 presents the empirical model and data. The Section 4 describes the benchmark results and a robustness check. The Section 5 presents the mechanism analysis. The Section 6 presents the heterogeneity analysis. Finally, the conclusions and policy recommendations are derived from the empirical outcomes.

#### **2. Theoretical Foundation**

#### *2.1. Carbon Price*

CET permits are traded as commodities in the exchange market to form an equilibrium carbon price. The carbon price signals emission reduction costs for enterprises [24]. The carbon price and its changes have a major impact on enterprises' investment decisionmaking [25].

First—the effect of the carbon price on a company's market value because the trading scheme puts compliance costs on the companies subject to it [2,26]. Carbon prices can influence companies' cash flows, as they can incorporate their carbon emission reduction costs in their sale offers [27]. If companies can pass on any additional costs arising from the trading scheme to their customers, then carbon prices have almost no effect on companies' cash flows [28]. The CET scheme will likely lead to additional costs for regulated companies when they cannot completely pass on the costs to their customers. Such circumstances will affect the companies' cash flows and their cost structure and production decision-making behaviors [3]. Companies need to arrange some part of their cash flows to purchase the CET permits, or to invest in emissions abatement equipment and measures, reducing their output [29]. Accordingly, capital market participants expect decreasing profits of regulated firms due to a rising carbon price for CET permits [1,2].

Second, the CET policy may provide appropriate carbon price signals to industrial operators who can select a strategy of capital investments in clean technology rather than operational practices, such as installing abatement equipment to minimize the sum of abatement costs and permit expenses [24]. When a company's productivity and competitiveness are relatively high, a rising carbon price in emission permits could encourage the company to invest in clean technology to meet emissions abatement requirements by the government [30]. This further results in an increase in the company's investors' expectations of future profits, leading to a higher market value for the company.

Finally, price fluctuations may affect investors' expectations, thereby affecting companies' market value. A variation in carbon prices is reflected in companies' output prices as well as in their costs [31]. Carbon price fluctuations can alter the preferred input combination that companies use in their production processes, thereby affecting their profitability and market value. In addition, according to some studies, a price floor for CET permits reduces uncertainty over companies' future profitability and influences the long-term price signal distribution, while a minimum carbon price creates incentives to invest in new low-carbon technologies [32,33]. Some studies have suggested that the effect of carbon price variations on companies' market value could be asymmetric [34,35].

#### *2.2. Innovative Activities*

The CET policy is an environmental instrument that gives individual firms flexibility how they achieve compliance [36]. This policy is expected to generate dynamic incentives to increase companies' innovative activities, mainly in terms of research, development, and demonstration (RD&D) and the adoption and diffusion of abatement technologies or low-carbon technologies [37,38]. Some companies with high abatement costs would purchase permits or conduct innovative activities to meet regulatory requirements. When regulated companies are not able to pass on the additional costs arising from the CET policy to their customers, while at the same time the imposed regulatory costs could even be overcompensated by the buyers, companies could be incentivized to undertake

innovative activities [2,39]. In this setting, companies are inclined to increase investment in emission reduction technologies and low-carbon technologies to achieve emission reduction targets [40]. This increases companies' fixed assets and technology levels, and enhances the value of their products, thereby promoting an increase in their market value [41].

Furthermore, improving companies' emission reduction performance will improve their image and help adjust the expectations of investors and other stakeholders, which will further increase the value of their products and the return in the stock market. Consequently, we can draw a research hypothesis that the CET policy could incentivize some companies to carry out innovative emissions abatement, clean, or low-carbon technologies, thereby enhancing their market value [42]. However, it is worth noting that the innovation effect of the CET policy also depends on market participants, networks, institutions, cumulative learning processes between users and producers, and companies' technology levels [36,40]. Accordingly, the government should improve the degree of marketization by improving laws and regulations related to the CET policy and formulating relevant implementation rules to reduce the impact of institutional uncertainty and institutional transaction costs [43]. Concurrently, the government can subsidize the innovation activities of companies, particularly costly innovation, which requires promotion from the government.
