Has the carbon emission trading scheme induced investment leakage in China? Firm-level evidence from China's stock market

This study investigates the causal relationship between the Emission Trading Scheme (ETS) and investment leakage in China, using firm-level subsidiary data for 4480 A-share listed companies with the Two-Way Fixed Effects (TWFE) Difference-in-Differences (DID) method under staggered treatment adoption. The results indicate that the ETS has significantly induced regulated firms to increase the share of investment in the non-pilot area by 2.5%, and the number of subsidiaries in the non-pilot by 2.035, suggesting that the policy has caused investment leakage. The rising operating cost due to ETS compliance may explain why regulated firms expand their outward investment. Furthermore, regulation intensity and social responsibility moderate the investment leakage effect. This study provides the first direct empirical evidence on the domestic investment leakage associated with the gradual ETS rollout in China and enriches the theory of the pollution haven effect by illuminating how the policy drives investment from the pilot area towards the non-pilot area.