VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS GRADUATION THESIS CASH FLOW VOLATILITY UNDER THE EMISSION TRADING SCHEME IMPLEMENTATION: WHAT CAN WE LEARN FROM CHINA? SUPERVISOR : MSc. Luu Hanh Nguyen STUDENT : Phung Ngoc Uyen - 19050771 CLASS : QH-2019-E - TCNH - CLC2 Hanoi, 2023 TABLE OF CONTENT WV. 4 LIST OF ABBREVIATTION.---s+5cSt HH HH ghe 5 IBkXN93áv.ÔÔÔÔLÔỎ 7 CHAPTER 1: INTRODUCTION 1115. Define research objectives and tasSÌKS.
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«chà nà nà HH tr trirtg 31 44,1, FOISIfICACION nh.---55--52HHHHHHHHnHH HH HH Hà Hà hành 35 5. c5 + HH HH HH Hà HH HH HH TH HH HH HH HH1 HH1 trketrrkrrrrkee 35 kW290619)x-i(0i1-6(009y-0i s7. Limitations and suggestions for further researCh. HH Hà Hà Hà HH HH HA HA HH HH nà gàng 38 DECLARATION I hereby declare that this is my own research work, the research results presented in the dissertation are honest and objective and have never been used in any other work for publication.
I hereby declare that I have been thanked for any help in carrying out this work, and the information cited in this work is expressly acknowledged. Hanoi, April 20, 2023 Author Phung Ngoc Uyen LIST OF ABBREVIATION Abbreviations Meanings CFV Cash flow volatility DID Difference-in-Difference ETS Emission Trading Scheme EU European Union R&D Research and development LIST OF TABLES Table 3.1: Description of Variables. HH HH HH HH H1 11g11 11tr.-‹---«-+xx++kk++kkEHHHTHHHHH HH HH HH HH HH HH Hiệp 27 Table 4.-- c1 HH HH HH HH HH Hiệu 30 Table 4. HH hy rtrrtrretrrek 32 Table 4.6: Dynamic timing teSts.
set HH HH HH HH Hy 34 ABSTRACT This study examines the impact of Emission Trading Scheme on cash flow volatility by analyzing data from high-emitting companies in China from 2010 to 2019. The study applies a staggered differences-in-differences method to investigate the impact of ETS on cash flow volatility. Control variables used in the analysis include firm size, firm age, cash ratio, liquidity, price-to-book ratio, profitability, and leverage, with varying effects on cash flow volatility. The results indicate that ETS significantly increases cash flow volatility for firms in high-carbon industries, which is consistent with prior research studies.
Moreover, the paper conducts robustness test and additional test, which are falsification and dynamic timing test to ensure the model's validity. In conclusion, these findings suggest that policymakers and firms should carefully consider the potential impacts of ETS on cash flow volatility and take appropriate measures to mitigate these risks. Keyword: Environmental Regulations; Emission Trading Scheme (ETS); Cash flow volatility; China; Difference-in-Difference. The urgency of the topic Since 1750, the concentration of methane in the atmosphere has increased by 156% to a rate not seen in 800,000 years (United States Environmental Protection Agency, 2022).
Methane has a global warming power 84 times higher on average than CO2 over a period of twenty years (United Nations Economic Commission for Europe). Agriculture is responsible for 60% of methane emissions, particularly from ruminant farming, while fossil fuel exploitation and transport account for around one-third of emissions (United Nations Economic Commission for Europe). The International Panel on Climate Change's sixth assessment report, which was first introduced in 1990, has constructed five climate change scenarios based on the amounts of greenhouse gas emissions emitted recently (IPCC, 2023). As a consequence, if humanity continues on its current path, we could see a temperature increase of 2.6 °C by 2100, leading to a sea level rise of up to one meter.
This process will have a long-term impact. It is expected that sea levels will continue to rise for centuries or even millennia due to melting glaciers and rising ocean temperatures as we have reached the most dangerous situation for the biochemical flows and the biosphere integrity. Based on preliminary analysis by Rockstrom et al., (2009), it appears that humans have already exceeded three environmental boundaries, namely climate change, biodiversity loss, and interference with the nitrogen cycle. The extent to which these boundaries can be crossed before causing unacceptable environmental changes and triggering feedback loops that may lead to catastrophic outcomes remains uncertain.
Immediate feedback mechanisms, such as the melting of Arctic sea ice, have already been activated after crossing the climate boundary for several decades. However, feedback mechanisms that operate over longer periods, such as the loss of polar ice sheets, are slower to manifest (Rockstrom et al. Achieving net-zero emissions has become a widely shared objective across the global economy. Policymakers around the world have introduced different environmental regulations to decrease emissions, ranging from market-based incentives like taxes or cap-and-trade emissions permits to command-and-control approaches such as setting limits, permits, and discharge standards (Tan et al., 2021; Wang and Guo, 2018; Tang et al.
Of all these instruments, the emission trading scheme (ETS) has emerged as a promising solution to address energy and environmental challenges through market mechanisms (Cui et al., 2018; Ju and Fujikawa, 2019). The most basic form of ETS involves policymakers establishing a limit on the total allowable emissions and providing allowances to emitters (Ren et al. Subsequently, companies with a surplus of allowances can sell them for profit, while those with a shortfall can purchase additional allowances through the market. As of the end of 2021, there are 32 operational or planned ETS in various countries and regions, including China, New Zealand, Switzerland, and the European Union (EU) (Yu et al.
While the notion of ETS has been discussed since the 1960s, first by Crocker, it only attracted attention from policymakers and economic authors in recent years (Zhu et al. Therefore, the real influence of ETS, however, remains ambiguous (Li et al., 2022; Chen et al. Although ETS has been linked to both negative and positive impacts on firms’ performance such as increased cash holding (Li et al., 2022), increased investment efficiency (Chen et al., 2022a), reduced yield management (Chen et al., 2022c), and reduced firms’ market power (Wang et al., 2022), its implication to the risk side performance measures such as uncertainty of incoming cash flow is surprisingly missing. Arguably, cash flow volatility (CFV hereafter) is one of the most crucial parts of a firm’s performance as it refers to the turbulence of cash inflows and outflows over time but yet largely understudied in the literature.
This element not only influences enterprises’ financial stability as it may struggle to meet short-term financial obligations but also investment and financing decisions, and operation efficiency. Managers value CFV as they mainly depend on cash flow status to make strategic planning and important operation decisions (Sun and Ding, 2020). A company with a clear understanding of its cash flow patterns can better plan for future investments and expansion and allocate resources more effectively. Additionally, cash flow stability is also critical to shareholders, creditors, and investors, as it is one of the fundamental determinants of the firm’s capital raising and collateral offering (Sun and Ding, 2020).
As in the most basic form of the ETS, policymakers set a cap on the total permissible emissions and distribute allowances to emitters (Ren et al. Then, firms with excess quotas can be sold at a profit, whereas firms with deficit quotas can 9 buy an additional number of allowances through the market. Regarding the ETS mechanism, firms that need to increase their emissions may have to acquire permits through the market, which could lead to additional costs (Li et al. The cost of permits can fluctuate depending on market conditions and permit supply and demand, creating uncertainty for firms and complicating cost projections (Oestreich and Tsiakas, 2015).
According to Zhang et al., (2022) and Xu et al., (2022), utilizing green innovation is a superior strategy for power enterprises in meeting their carbon quota requirements in the carbon market, as compared to purchasing carbon quotas. By implementing green innovation, companies can improve their energy efficiency, reduce long-term pollutant emissions, and upgrade outdated equipment with high pollution emissions, as noted by Zhao et al. While newer technologies, such as solar panels, may be more expensive to install than conventional equipment, it may result in a decrease in short- term cash flow for enterprises. Given the potential for ETS policies to impact CFV, it is important for companies to carefully examine the impact of ETS on firms’ CFV.
By analyzing the influence of ETS on CFV, companies can better understand their financial position, make informed investment and financing decisions, and plan for future growth. In particular, companies that are able to anticipate and manage the effects of ETS policies on their cash flow patterns are likely to be better positioned to weather short-term financial challenges and capitalize on long-term growth opportunities. Define research objectives and tasks The purpose of this research is to investigate whether the implementation of an ETS program has an impact on firms' CFV and whether cash flow uncertainty remains robust to such environmental regulation. The findings of this study are intended to provide valuable insights for the decision-making process of board managers, with the aim of improving financial performance and contributing to the growth of the country's economy.
Hence, the research investigates whether and to what extend ETS affects firms’ CFV. Moreover, the study aims to learn from the experience of China, contributing to the development of low-carbon and sustainable system in Vietnam. Research scopes This study exploits the adoption of the ETS program in China to test the influence of ETS on firms’ CFV. Moreover, I examined the data from 2010 to 2019 as the duration of ETS pilot implementation in China began in the 3-year duration since 2013, when seven provinces! were sequentially selected to carry the pilot ETS adoption program.
In 2013, the ETS project was launched in Beijing, Tianjin, Shanghai and Guangdong before being implemented in Hubei and Chongqing in 2014. After the introduction of the Fujian ETS in 2016, China has reduced about 1,400 million tons of CO2-equivalent emissions with the participation of more than 3,200 organizations (ICAP, 2019). In addition, China, as the world's largest emitter nation, has committed to reaching a carbon peak in September 2020 before 2030 and carbon neutrality before 2060 (Yu et al., 2021; Wang et al., 2016; Nie et al. However, this country faces several issues in the ETS, such as an imperfect trading mechanism, as China's carbon trading market operates in the short term (Liu et al.
In addition, comparatively fewer studies have been conducted on China with the impact of the ETS on CFV has not been sufficiently explored. Therefore, the study on China could complement and contribute to policy proposals for other emerging countries. Overview of research methodology The paper utilizes data from over 9570 high emitted firms in China from 2010 to 2019 through a staggered difference-in-difference (DID) method. It finds that ETS significantly increases the fluctuation of cash flow for firms in high-carbon industries.
Specifically, the findings support the idea that ETS could pose an increased risk to businesses in high-carbon industries, as carbon risk can generate non-diversifiable risk premium requirements and distress risk (Nguyen and Phan, 2020; Safiullah et al. These firms may face additional compliance costs and environmental penalties, which could potentially harm their profitability and hinder their growth prospects (Stroebel and Wurgler, 2021; Cai et al. Our result is consistent with the conclusion of Ni et al., (2022), who show that ETS can incentivize risky investments that can be somewhat value-added in the long run, but also increase distress risk, which resulted in cash flow. 1 Beijing, Tianjin, Shanghai, Guangdong, Fujian, Hubei, and Chongqing.