Political Connections and the Transition to Low-carbon Energy Sources in China: Evidence from a Quasi-natural Experiment

We extend existing research on political connections to test their role in facilitating or hindering the transition to low-carbon energy in China. This paper uses hand-collected evidence on political connections from the r & eacute;sum & eacute;s of executives and directors of energy firms operating across clean and emissions-intensive (i.e., fossil-fuel intensive) sectors in China. To obtain exogenous variation in the transition towards low-carbon energy sources, we exploit the enactment of China's 2013 Action Plan on Air Pollution Prevention and Control (the Action Plan) as a quasi-natural experiment. The plan favoured low-carbon energy sources over traditional energy sources. Using a difference-in-differences methodology, we investigate the impact of these political connections on firm performance before and after the country issued the 2013 Action Plan. Our results suggests that low-carbon energy firms experienced a significant improvement in their operational performance immediately after the implementation of the 2013 Action Plan, with both return on equity (ROE) and return on assets (ROA) significantly higher for politically connected firms than for politically unconnected firms. Financial performance, as measured by Tobin's Q, significantly increased for politically connected low-carbon energy firms three years after the implementation of the Action Plan, suggesting that political connections have also led to longer-term financial benefits. Our results provide evidence that, as the transition to low-carbon energy proceeded, business-state ties have improved firm performance in sectors targeted by government policy.