TITLE:
Emissions Trading and Carbon Intensity Regulation in China’s Steel Sector: Environmental and Financial Outcomes from a Difference-in-Differences Analysis
AUTHORS:
Igwe Chukwuebuka Prince, Yingchun Song
KEYWORDS:
Carbon Intensity, Emissions Trading System (ETS), Corporate Performance, Chinese Steel Manufacturing, Difference-in-Differences, Staggered DID, Parallel Trends, Low-Carbon Innovation, Sustainability
JOURNAL NAME:
Open Access Library Journal,
Vol.13 No.6,
June
30,
2026
ABSTRACT: This study examines how China’s carbon intensity reduction policies and emissions trading participation have affected firm-level outcomes in the steel industry from 2010 through 2024. We compile an unbalanced panel of 120 major Chinese steel firms with data on environmental metrics (CO2 emissions per tonne of steel) and financial performance indicators, profitability, leverage, and investment. Employing a difference-in-differences (DID) framework that separately identifies two distinct policy channels, regional pilot ETS exposure and binding government-mandated carbon intensity targets, we compare treated firms against controls before and after policy implementation. To ensure causal credibility, we conduct formal event-study analyses to verify parallel pre-treatment trends, implement staggered-DID estimators to address heterogeneous treatment timing across the seven pilot jurisdictions, and cluster all standard errors at the firm level. We address endogeneity concerns by controlling for concurrent confounding policies, including output production caps, central environmental inspection campaigns, and supply-side capacity elimination, and by implementing propensity score matching DID (PSM-DID) and sensitivity bounds for unobservable selection. Our results indicate that firms subject to pilot ETS regulation achieved statistically significant additional reductions in emissions intensity, approximately 0.05 tCO2/t steel, beyond industry-wide improvements, with firm-clustered standard errors confirming significance at the 5% level. Firms under binding intensity targets also reduced emissions, though with smaller and less precisely estimated effects. Importantly, we find no statistically significant evidence that these regulatory pressures harmed economic performance; return on assets rose modestly among pilot-ETS firms by approximately 0.7 percentage points, though this effect is only marginally significant (p