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Climate Policy and Carbon Leakage: Evidence from Investment Relocation of Chinese Corporations

Zhang, Xinrui LU (2025) NEKN02 20251
Department of Economics
Abstract
Carbon leakage resulting from asymmetric climate policies undermines the effectiveness of global climate governance. This paper examines whether China’s national Emissions Trading System, launched in 2021, has induced carbon leakage through outward foreign direct investment at the firm level. Using firm-level data and a PSM-DID approach, this study finds no evidence of investment-driven carbon leakage. On the contrary, firms subject to the ETS exhibit significant reductions in both the scale and geographic scope of OFDI. This suggests a conservative response to regulatory uncertainty and weak carbon price signals during the early implementation phase. Further analysis reveals that the negative impact is weaker for investments in Belt and... (More)
Carbon leakage resulting from asymmetric climate policies undermines the effectiveness of global climate governance. This paper examines whether China’s national Emissions Trading System, launched in 2021, has induced carbon leakage through outward foreign direct investment at the firm level. Using firm-level data and a PSM-DID approach, this study finds no evidence of investment-driven carbon leakage. On the contrary, firms subject to the ETS exhibit significant reductions in both the scale and geographic scope of OFDI. This suggests a conservative response to regulatory uncertainty and weak carbon price signals during the early implementation phase. Further analysis reveals that the negative impact is weaker for investments in Belt and Road Initiative countries, where institutional support may mitigate compliance and market risks. The findings highlight the need to align climate policy with development strategy and to promote green OFDI through improved carbon market design. (Less)
Please use this url to cite or link to this publication:
author
Zhang, Xinrui LU
supervisor
organization
course
NEKN02 20251
year
type
H1 - Master's Degree (One Year)
subject
keywords
Emissions Trading System Carbon Leakage Outward Foreign Direct Investment
language
English
id
9194800
date added to LUP
2025-09-12 10:47:14
date last changed
2025-09-12 10:47:14
@misc{9194800,
  abstract     = {{Carbon leakage resulting from asymmetric climate policies undermines the effectiveness of global climate governance. This paper examines whether China’s national Emissions Trading System, launched in 2021, has induced carbon leakage through outward foreign direct investment at the firm level. Using firm-level data and a PSM-DID approach, this study finds no evidence of investment-driven carbon leakage. On the contrary, firms subject to the ETS exhibit significant reductions in both the scale and geographic scope of OFDI. This suggests a conservative response to regulatory uncertainty and weak carbon price signals during the early implementation phase. Further analysis reveals that the negative impact is weaker for investments in Belt and Road Initiative countries, where institutional support may mitigate compliance and market risks. The findings highlight the need to align climate policy with development strategy and to promote green OFDI through improved carbon market design.}},
  author       = {{Zhang, Xinrui}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Climate Policy and Carbon Leakage: Evidence from Investment Relocation of Chinese Corporations}},
  year         = {{2025}},
}