Shaping corporate carbon strategies: The role of market-based environmental regulation in China's emissions trading scheme

Market-based environmental regulation has become an important institutional instrument in transitioning economies, yet its influence on firm-level behaviour remains insufficiently understood. This study examines whether China's emissions trading scheme (ETS), as a newly established market institution, is associated with changes in corporate carbon behaviour by exploiting the staggered introduction of ETS pilot programmes as a quasi-natural experiment. Using panel data on 2,231 A-share listed firms across 221 Chinese cities from 2001 to 2020, we apply a staggered difference-in-differences (DID) framework, complemented by modern multi-period DID estimators, to examine whether ETS exposure is associated with changes in corporate carbon emissions (CE) and carbon attention (CA). We refer to this disclosure-based measure as carbon attention. CA is measured using a text-based indicator derived from firms’ annual reports, capturing an observable informational and behavioural response to carbon constraints rather than an intrinsic environmental preference. The results indicate that ETS implementation is associated with a statistically significant reduction in CE and a simultaneous increase in firms’ disclosure-based CA. These findings remain directionally similar across event-study tests, placebo experiments, synthetic control methods, and supplementary instrumental-variable checks. The transmission-related analysis provides suggestive association evidence that ETS exposure is accompanied by changes in internal information environments, internal-control and reporting-quality margins, managerial adjustment, profitability, and environmental expenditure. By jointly analysing emissions outcomes and disclosure-based behavioural responses, this study provides firm-level evidence on how market-based institutions are associated with firm-level adjustment along organisational and informational margins in a major developing economy.