VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS GRADUATION THESIS DOES CARBON PRICING POLICY AFFECT FIRMS' INVESTMENT DECISIONS? THE CASE OF CHINA'S EMISSION TRADING SCHEMES Supervisor : MSc. Luu Hanh Nguyen Student : Nguyen Thi Tra My - 19050699 Class : QH2019E TCNH CLC2 Hanoi, 2023 TABLE OF CONTENTS Acknowlegdement 4 List of tables 5 List of abbreviations 5 Abstract 6 CHAPTER 1: INTRODUCTION 7 1. Contribution of Research 10 1. Research Structure 11 CHAPTER 2: LITERATURE REVIEW 12 2.
The theoretical framework for Emission Trading Schemes 12 2. Emission Trading Schemes 12 2. Conceptual background on Emission Trading Schemes 14 2. The relationship between environmental regulation and firms' behavior 16 2.
The research gap 17 2. Hypothesis development 18 CHAPTER 3: RESEARCH METHODOLOGY 21 3. Data and Sample 21 3. Measurement of Main Variables 21 3.
The dependent variable 21 3. The dummy variable 22 3. The control variables 22 3.4, The moderating variable 23 3. Empirical Model 23 CHAPTER 4: RESULTS AND DISCUSSION 25 4.
Dynamic timing tests 33 4. Economic mechanism 36 CHAPTER 5: CONCLUSION 39 5. Limitations and Suggestions 40 References 42 Acknowlegdement I would like to express my sincere gratitude to my supervisors MSc. Luu Hanh Nguyen for her continuous support of my research, for their patience, encouragement, enthusiasm, and immense knowledge.
Her invaluable guidance has helped me in all the time of researching , writing this thesis endless support during my studying period. I would like to express my gratefulness to all the lectures in the faculty of Finance and Banking, University of Econimics and Business, Vietnam National University who have conveyed extremely valuable lessons for me during recent four years. Last but not least, I would like to thank all my family including my parents, my friends. Without their unconditional support and endless encouragement, I could hardly finish my graduation thesis.
Student Nguyen Thi Tra My List of tables Table 1: SUMMALY ¬rs is. 25 IE))I22200wi-r(9i10i ri 11. 26 Table 3: Baseline r€SuÏtS. + 2x 1t HT TT TT CC HH TT TH HH 29 Table 4: RODUStNESS t©SÉS.
- ST TY HH KH TH HH TT TT TH Hàn Hàn Tà Tàn LH 32 Table 5: Dynamic timing t©SES. các HH HH ng TH TT TH BH KH KH KH Hư nHrret 34 Table 6: Placebo f@SS. -- ch HH TH» HH HT HH HT TT TT TH TH KH KH KH KH HH ki 36 Table 7: Economic mechainiiSIm.--- -- «<< << 2 1k ST TH TH KH KH KH HT HH HH 38 List of abbreviations mm —— Abstract This study uses a quasi-natural experiment with the Difference-in-Differences (DiD) method to examine the impact of the Chinese Emissions Trading Schemes (ETS) pilot on the capital investment decisions of over 3500 listed firms in China from 2010-2022. The results show that the pilot projects related to ETS have a positive relationship with the firm's capital investment, providing evidence that ETS can be an effective way to increase firms’ capital investment.
The study also found that the ETS had a positive effect on a firm's financial performance, with an increase in tangible assets, market capital, and cash flow from operating activities. The robustness checks, placebo tests, and dynamic timing tests support the conclusion that the implementation of the ETS pilot could significantly promote the firm's capital investment in China. These findings have important implications for policymakers and business leaders seeking to promote sustainable investments and reduce carbon emissions. However, further research may be needed to confirm and extend the findings to other settings or industries.
Key words: Emission Trading Schemes, China’s ETS, CAPEX, Capital Investment, DiD, Carbon pricing, Environmental Regulation, Sustainable Finance CHAPTER 1: INTRODUCTION 1. Research Background Climate change is indeed an alarming issue for the environment worldwide. It poses a significant threat to the Earth's ecosystems, including wildlife, plants, and habitats, as well as to human societies and economies (Ren et al, 2020; Chen et al, 2021; Yang et al, 2021; Ni et al, 2022). One of the most significant impacts of climate change is the increase of greenhouse gas (GHG) in global temperatures (Yang et al, 2021; Liu et al, 2022).
GHG emissions come from a variety of human activities, such as burning fossil fuels for transportation and energy, deforestation, agriculture, and industrial processes. These activities release large amounts of carbon dioxide, methane, and other greenhouse gasses into the atmosphere, which trap heat and contribute to global warming. The effects of GHG emissions are significant and far-reaching (Liu et al, 2022). Climate change can cause sea levels to rise, more severe weather events such as hurricanes and droughts, and changes in ecosystems and wildlife habitats.
It can also affect human health, by exacerbating air pollution and increasing the spread of diseases carried by insects and other vectors. Reducing GHG emissions is crucial to mitigating the impacts of climate change followed by the Kyoto Protocol in 1997. This can be done by transitioning to cleaner energy sources such as renewable energy, improving energy efficiency, reducing waste, and adopting sustainable land use practices. Governments, businesses, and individuals all have a role to play in reducing GHG emissions and addressing the urgent need to address climate change.
To address the issue of climate change, it is essential to take action to reduce greenhouse gas emissions and promote the use of renewable energy sources. Emission trading schemes (ETS) have emerged as a critical tool to mitigate the impacts of climate change. The first major ETS was established in 1995 in the United States to curb sulfur dioxide emissions that cause acid rain. It showed that cap-and-trade systems could work to reduce emissions at a lower cost.
In 1997, the Kyoto Protocol was adopted and allowed for international emissions trading between countries. Countries are enabled to buy or sell emission allowances to meet their treaty commitments. The European Union ETS was launched in 2005 to help EU countries meet Kyoto targets. After that, several countries and regions respectively have established their own ETS, including New Zealand, California, China, and Korea,.
These systems have varying degrees of scope and stringency but are also linked to generating greater emissions reductions and cost efficiencies. The ETS refers to systems that allow countries or companies to trade carbon credits or emissions allowances. China is the world's largest carbon emission emitter (Nie et al., 2017; Yu et al., 2021) and accounts for approximately 28% of global carbon dioxide emissions (China Power Project). In 2020, China policymakers announced that China would aim to reduce the target of peaking carbon emissions by 2030 and achieve carbon neutrality by 2060, which would require a significant reduction in greenhouse gas emissions follow by the Nationally Determined Contribution of the Paris Agreement (Yu et al., 2021; Li et al, 2022; Liu et al, 2022; Ni et al, 2022).
To achieve this goal, China has set targets for increasing the share of renewable energy in its energy mix, improving energy efficiency, and reducing coal consumption (Tan et al, 2022; Chen et al, 2022a). In addition, China has launched several initiatives to promote green finance and support low-carbon development. In 2011, China announced plans to launch carbon trading schemes in several regions as part of its efforts to reduce greenhouse gas emissions. The national ETS is an important step towards achieving this goal and promoting sustainable development in China and globally.
In 2013, four provinces including Beijing, Shanghai, Guangdong, Shenzhen and Tianjin began to adopt the ETS pilot. In 2014, Hubei and Chongqing implemented this policy. In 2016, the ETS pilot was launched in Fujian. The launch of ETS in China reflects the country's commitment to reducing its greenhouse gas emissions and addressing the global challenge of climate change and Sustainable Development Goals (SDGs).
Several studies have examined how the ETS pilot in China has affected firms' performances. The prior study found that firms that were allocated fewer emissions allowances under the ETS pilot considerably enhanced firm environmental and economic performance (Ren et al, 2022), improved the firm financing efficiency (Li et al, 2021), increase firm’s cash holding (Li et al, 2022), significantly increases a firm’s cost of debt (Ni et al, 2022), incentivize firm’s innovation (Ren et al, 2020; Ren et al, 2022), restraints excessive investment and encourages business investment efficiency (Chen et al, 2022a). Another study found that firms in the ETS pilot reduced output, cash flow and expected income (Chen et al, 2021), negatively affecting real earnings management ( Chen et al, 2022b). Carbon trading policies have gained increasing attention in recent years as a means to mitigate the impacts of climate change.
One question that has arisen is whether carbon trading can incentivize firms to invest in low-carbon technologies and reduce emissions. This topic has explored the impact of environmental regulation on a firm's capital investment through research on the Emissions Trading System pilot in China. Research Objectives The research objectives focused on key points. First of all, the research summarizes prominent theories of emission trading schemes and firm capital investment.
Second, the research aims to investigate how the ETS pilot in China has influenced firms' decisions to invest in capital and explore the potential benefits and challenges of ETS in promoting sustainable investments and reducing greenhouse gas emissions. Third, the research provides insights into the effectiveness of this market-based mechanism in promoting sustainable investments and reducing greenhouse gas emissions. The findings of the research can inform policymakers, businesses, and investors about the potential benefits and challenges of ETS, and guide the design and implementation of effective climate policies. Research Questions This research considers how the implementation of ETS affects firms’ decisions to invest in capital and what are the potential benefits and challenges of this market-based mechanism in promoting sustainable investments and reducing greenhouse gas emissions.
This research question would involve examining the impact of ETS on firms' investment decisions, exploring the factors that influence firms’ decisions to invest in low- carbon technologies, and assessing the potential benefits and challenges of ETS in promoting sustainable investments. Research Scopes The research collected data from over 3500 listed firms in 33 administrative divisions in China from 2010 to 2022 in the Refinitiv database and chose eight China provinces that implemented the ETS pilot including Shenzhen, Guangdong, Shanghai, Beijing, and Tinajin from 2013, Chongqing and Hubei from 2014, Fujian from 2016 and focused on the high carbon emission industrial consist industries, transportation, power, buildings and manufacturing followed by Ren et al, 2022; Chen et al, 2021; Yang et al, 2021. Research Methodology Study the relationship between the emission trading schemes and the firm's capital investment by using the staggered difference in difference model (DiD) with several tests including summary statistics, correlations matrix, baseline tests, robustness tests and additional tests to examine the impact of the ETS pilot on corporate capital investment behavior in China. The use of the DiD model provides a rigorous approach to estimating the causal effect of the ETS pilot on capital investment decisions, while the various tests help to ensure the validity and robustness of the results.
The summary statistics and correlation matrix provide an overview of the data and identify any potential outliers or data quality issues, while the baseline tests help to establish a baseline estimate of the treatment effect. The DiD method can address some of the challenges associated with traditional cross- sectional studies, such as omitted variable bias and endogeneity. By comparing changes in outcomes over time within groups, the DiD method can control for any time-invariant differences between the groups, such as unobserved characteristics or selection bias in this study. Besides, the robustness tests and additional tests provide further evidence to support the validity of the findings and address any potential concerns, such as selection bias or omitted variable bias.
To recap, this study provides important insights into the impact of environmental policies on firms' behavior and can inform policymakers and business leaders seeking to promote sustainable investments and reduce carbon emissions. Contribution of Research This study adds several contributions to the literature.