Does the emissions trading system in developing countries accelerate carbon leakage through OFDI? Evidence from China

Carbon leakage caused by unbalanced climate policy constraints seriously damages the process of global climate governance. As far as developing countries are concerned, carbon leakage through investment is a more urgent issue. Based on firm level data, we employ PSM-DID to evaluate the impact of China's pilot ETSs on firm's outward direct investment decision. The empirical results prove that ETS has accelerated both the depth and breadth of outward direct investment from China. The Belt and Road Initiative has facilitated carbon leakage through investment. The host countries without ETS are more attractive than belonging to Belt and Road countries for China's OFDI. The firm's production efficiency, ownership, and marketization level of home region also have important impacts on carbon leakage. China should fully consider carbon leakage in progress of formulating national emissions trading system and actively promote the construction of a green Belt and Road through carbon market linking.

Automated summary

Unbalanced climate policy constraints lead to carbon leakage, seriously damaging the global climate governance process. Developing countries are facing a more urgent issue of carbon leakage through investment. China's pilot emissions trading systems have accelerated outward direct investment depth and breadth, while the Belt and Road Initiative has facilitated carbon leakage.