Environmental policy and distance to firms: An analysis of publicly listed firms in China

Focusing on the seven regions with pilot emission trading scheme (ETS) in China, we develop a novel theory explaining firms’ environmental investment (EI) decision, which is endogenous to the spatial effects associated with waste-recycling facility (WRF) proximity and ETS induced peer-to-peer learning. A novel feature is that, due to the use of resource inputs, firms incur both recyclable and carbon-intensive waste disposal costs. This leads to two empirically testable propositions and a conjecture, which we evaluate based on cross-sectional analyses of 1717 public listed firms in China during the 2015–20 periods. We find WRF proximity to correlate positively with observed EI take-up, and this is subsequently associated with higher labor productivity. However, ETS-infused peer learning effect has the opposite effect in that proximity to an investing neighbor results seems to be associated with freeriding, especially when the difference in internal margins between firms is accounted for. While there are overall positive spatial spillover effects, this results in policy rivalry (between the two policies), where the freeriding effect not only results in a lack of ETS policy effect onto labor productivity of even the 219 EI firms, but also mitigates the positive WRF proximity effect.