Does low-carbon pilot policy in China improve corporate profitability? The role of innovation and subsidy

Abstract

In an effort to aggressively combat climate change, China implemented a low-carbon city pilot policy (LCCP) in 2010. This study analyzes the impact LCCP, which is a specific environmental regulation on firms' profitability and innovation performance. The study argues that LCCP has an impact on corporate profitability by enhancing corporate innovation. Based on the data of A-share listed enterprises from 2005 to 2020, this study employ a multi-period Differences-in-Differences (DID) method to explore whether and how the LCCP affects the profitability of enterprises. The study finds that: (1) LCCP can greatly increase enterprise profitability; (2) LCCP has a more prompt effect on the profitability of large companies; (3) LCCP increases innovation investment and financial subsidies, which in turn increases company profitability. The study enriches the body of knowledge on the effects of LCCP on large companies and SMEs, and provides crucial evidence base for the consequences of government's strategy to assist firms in achieving the low carbon growth.

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