Market Incentive Environmental Regulation and Enterprise Risk-Taking: Taking the Pilot Policy of Carbon Emission Trading as an Example

Abstract

Global warming is a critical issue globally, necessitating immediate action on energy conservation and emission reduction. As a responsible emerging power, China has continuously refined its domestic carbon emission trading system, setting targets for carbon peak and carbon neutrality. However, environmental regulations introduce uncertainty and risk into corporate production, investment, and profitability. This paper introduces the concept of proactive risk-taking by enterprises.

Carbon emissions trading is a significant tool for market-based environmental regulation. This paper conducts both theoretical analysis and empirical testing based on China’s pilot policies for carbon emissions trading. Initially, a theoretical model is constructed to reflect corporate carbon emissions trading behaviors, exploring how such trading influences the risk-taking levels of light and heavy polluting enterprises. The theory suggests that carbon emissions trading helps guide corporate R&D innovation, reduce production costs, and enhance profits, ultimately elevating corporate risk-taking levels.

Using the seven pilot regions established by China’s National Development and Reform Commission for carbon emissions trading as a quasi-natural experiment, and data from Chinese A-share listed companies, empirical research is conducted. The results reveal that market-based environmental regulation significantly enhances the risk-taking levels of enterprises in pilot regions, particularly elevating the risk-taking levels of light-polluting enterprises, non-state-owned enterprises, and those in the eastern region. Mechanism analysis indicates that market-based environmental regulation enhances corporate risk-taking levels by promoting R&D innovation, productivity, and profitability. Moreover, this promotional effect is more pronounced in light-polluting enterprises compared to heavy-polluting ones.

This paper’s potential marginal contributions are twofold: First, from a research perspective, unlike existing literature which mostly analyzes mechanisms from the perspectives of the “cost” effect and “innovation compensation” effect of environmental regulations, this paper primarily examines the role of corporate engagement in carbon emissions trading and its subsequent economic effects on proactive risk-taking by enterprises. Second, in terms of theoretical value, this paper constructs a theoretical model to deduce the economic consequences of heavy and light-polluting enterprises’ participation in carbon emissions trading, exploring the operational mechanism of carbon emissions trading. Fundamentally, the mechanism of action in this paper originates from the engagement of enterprises in carbon emissions trading, affirming the effectiveness of market-led pollution emission rights in governing the environment.

This study affirms the positive role of market-based environmental regulation from the perspective of risk-taking. Economically, integrating environmental governance with market mechanisms can effectively mobilize enterprises to address the external diseconomies of environmental pollution, encouraging them to proactively assume the uncertainties brought about by environmental regulation and the risks associated with economic transformation. Facing the pressure of environmental governance, enterprises should actively respond to the opportunities and challenges brought by carbon emissions trading and improve their risk-taking through research and development innovation.