China's ETS pilots: Program design, industry risk, and long-term investment

The emissions trading scheme (ETS) is considered an effective policy tool for achieving emission reductions. At present, China’s ETS pilots have completed several compliance periods and provided rich experience for a national ETS. Taking advantage of the variations in the regional ETS pilots across regions and sectors and over time, this study used a difference-in-difference-in-differences (DDD) model to examine the effects of ETS pilots and differential program design on industry risk and the impacts of risk on future investment horizon. First, we found that the ETS pilots significantly increase profit variability (total risk) in China’s industry; that is, ETS induces greater uncertainty in the covered sectors. In terms of industry heterogeneity, non-electricity sectors (specifically ferrous metal) engage in higher levels of risk taking. Second, the influence of such program features as the allowance allocation (total amounts and approaches), China Certification Emission Reduction (CCER) trading volumes, and penalties are heterogeneous. Finally, during the period around the treatment, industry risk can significantly encourage longer rather than shorter investment. In particular, the punishment mechanism and benchmarking allocation play a positive role in regulating the risk‒investment relationship.