TPS puzzle and government disclosure

Abstract

Carbon emission trading systems (ETS) across countries employ two main methods for allocating emission allowances: cap-and-trade (CT) and tradable performance standard (TPS). Understanding the different effects of these two policies is important for both policymakers and academia. Despite the significance, little empirical evidence is available. This paper provides comprehensive empirical evidence comparing TPS and CT policies regarding firms’ production, emission, emission intensity and environmental investment. The findings of this paper confirm previous empirical studies in the power industry subsample, showing that TPS policy fails to maintain firms’ production or environmental investment in aggregate. However, the results of previous empirical studies and this paper are inconsistent with current theoretical papers, which state that TPS is supposed to motivate firms to maintain production, decrease emission intensity, and invest in green innovation. To investigate the reason behind this inconsistency, this paper further conducts empirical tests separately in clear and unclear provinces and finds that one of the key reasons is government disclosure. When firms are well informed in clear provinces, TPS can motivate them to maintain production and environmental investment. However, when policy is unclear, TPS fails to motivate firms to maintain production. In unclear provinces, under both policies, firms respond similarly and aggressively in controlling their emission and emission intensity by reducing their production, but they are conservative in their environmental investment. Keywords: carbon emission; emission trading system (ETS); carbon allowance allocation policies; green innovation

Date of Award	2024
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology
Supervisor	Zhanhui CHEN (Supervisor)