Can emission trading system improve capacity utilization? A quasi-natural experiment in Chinese listed firms

Improving capacity utilization (CU) is a critical way for China to promote economic transformation and achieve sustainable development. As a market-based environmental regulation proposed to achieve a low-carbon economy and green transformation, whether emission trading system (ETS) can improve CU deserves an in-depth study. We conduct an empirical study by constructing a multi-period difference-in-differences model with 1,037 Chinese A-share listed firms from 2004 to 2020 as the research sample. The result shows that the ETS can significantly improve CU, which still holds after a series of robustness tests. The mechanism analysis shows that the ETS improves CU through three mechanisms: stimulating green innovation, restricting over-investment, and alleviating financing constraints. Based on the heterogeneity analysis, the improvement of CU by ETS is greater among listed firms in heavy-polluting industries, with good ESG performance, excess leverage, and central state ownership. Our study supports the global implementation of the ETS and provides ideas for resolving overcapacity in the context of global decarbonization.