Carbon emissions trading system and corporate financial decisions: evidence from China

Using a staggered difference-in-differences (DID) approach on a sample of Chinese A-share listed firms, we find that the carbon emissions trading system (ETS) increases financial distress risk for emission-regulated firms, prompting them to adopt more conservative financial strategies. To mitigate the risks of carbon reduction policies, these firms reduce total investment, increase cash holdings, and reallocate resources toward low-carbon technologies to facilitate the low-carbon transition. Our analysis of heterogeneity in market competition reveals that the inhibitory effect of the carbon emissions trading system on corporate investment is stronger in less competitive markets. This study shows that climate policy risk really does play a role in how companies make financial decisions. It also provides insights for policymakers on designing cost-bearing mechanisms within climate mitigation policies to ensure the effective implementation of the “polluter pays” principle.