The impact of carbon emission trading policy on overcapacity of companies: Evidence from China

As a market incentive-based environmental regulation, the carbon emission trading (CET) policy is an important tool for China to achieve “carbon peak” and “carbon neutrality” goals. However, it is not clear how the CET policy will affect companies' overcapacity. Given this, based on collecting the list of the CET pilot companies, this paper uses the difference-in-differences (DID) model to explore the impact of the CET policy on companies' overcapacity. It's found that the CET policy will significantly aggravate companies' overcapacity. The results of the mechanism analysis show that the CET policy will expand companies' fixed assets investment, reduce their turnover of fixed assets, and increase the credit support and green subsidies provided by the government to companies, thereby leading to a disorderly expansion of capacity. Besides, heterogeneity analysis shows that companies' overcapacity aggravation caused by the CET policy is more prominent in regions with low marketization levels, backward economic development levels, and weak environmental regulation intensity, state-owned companies and companies with low R&D levels. This paper not only provides new research literature for the CET policy and overcapacity, but also provides more empirical evidence at the micro level for the continuous improvement of the national CET market.