How Carbon Emission Trading Schemes Affect Corporate Environmental and Social Disclosure
Examining how institutional pressure reshapes sustainability reporting practices
1What are Carbon Emission Trading Schemes (CETS)?
CETS are market-based mechanisms to combat climate change, where companies receive carbon emission quotas. Those exceeding limits must buy credits from under-emitting firms. China's phased implementation from 2013-2024 was studied using 16,348 firm-year observations from 1,682 listed companies, providing robust data on the system's corporate impacts.
2Increased environmental and social disclosure
The research reveals CETS significantly boost both environmental and social (E S) disclosures. Notably, the system affects not just environmental reporting but also social responsibility disclosures, suggesting its influence extends beyond initial expectations. This broader impact highlights the scheme's comprehensive effect on corporate transparency.
3Effects of mandatory participation
Under coercive participation, CETS shows marginally significant positive effects on social disclosures but no meaningful impact on environmental reporting. This pattern suggests companies employ a legitimacy compensation mechanism, offsetting environmental legitimacy gaps through low-cost, high-visibility symbolic reporting rather than substantive changes.
4Voluntary participation differences
In non-coercive contexts, CETS substantially enhances both environmental and social disclosures. The key distinction lies in companies strategically using disclosures as signaling devices. Voluntary participants leverage the opportunity to demonstrate sustainability commitments to stakeholders, resulting in more comprehensive reporting.
5Operational efficiency as moderator
Highly operationally efficient firms show weaker responsiveness to CETS pressures, likely because their existing performance reduces need for additional motivation. Conversely, less efficient companies demonstrate greater disclosure improvements, suggesting the system particularly benefits laggards in corporate sustainability practices.
6Managerial environmental focus
The positive effect of CETS on disclosures strengthens with managers' environmental focus. This finding underscores how executive cognition shapes institutional pressure effectiveness. Environmentally-conscious management teams appear more receptive to such schemes, better translating external pressures into concrete reporting improvements.
7Practical implications for industry
The study offers valuable insights for sustainable operations management, particularly in energy and heavy industries. Companies should balance operational efficiency improvements with enhancing management's environmental awareness. This dual approach could yield more effective sustainability reporting and better compliance with evolving regulations.
8Global climate policy implications
China's CETS experience provides valuable lessons for other nations, especially developing economies designing carbon markets. Policymakers should carefully balance mandatory and voluntary participation mechanisms, recognizing that institutional pressure effectiveness depends on firms' internal capacities. These insights could inform more effective climate policy designs worldwide.