National mitigation policy and the competitiveness of Chinese firms

This paper analyzes the impacts of carbon intensity control introduced by China's National Plan on firm competitiveness. By exploiting plausibly exogenous variation in the mandates on carbon intensity reduction across locations, we find that the exposure to mandate significantly decreases firm's energy intensity, but does not affect firm competitiveness measured by productivity. We show that exposure to carbon intensity control causes firms to increase their low-carbon patents by 0.9% and low-carbon patent ratio by 0.2%, with no crowding-out effect on non-low-carbon innovation. Low-carbon innovation induced by the mandate increases firm outputs by expanding the size of labour inputs and fixed assets. Therefore, although exposure to mandate reduces capital productivity, the induced innovation mitigates the negative impact through input augmentation rather than improving the energy productivity or productivity on labour or capital. This explains why mandated intensity-based policy can be an effective instrument for mitigating the greenhouse gases without harming firm competitiveness.