Impacts of Emissions Trading Scheme Initiatives on Corporate Carbon Proactivity and Financial Performance

Abstract

This study introduces the concept of carbon proactivity and considers not only the quantity of emissions but also corporate carbon-reduction efforts and actions to explore the relationship between carbon proactivity, the emissions trading scheme (ETS) mechanism, and corporate financial performance. A matched-pair approach was adopted to explore the difference in carbon proactivity between ETS and non-ETS firms. The study aims to investigate the impacts of an ETS on corporate carbon proactivity and whether participating in an ETS can help a firm achieve a desired outcome in which it can improve both environmental and economic performance. Using manually collected data on carbon disclosure, it was found that carbon proactivity is higher among firms that participate in an ETS than among those that do not, and carbon proactivity is trending upward for the participating firms. In addition, evidence suggests that while investing more resources in carbon proactivity decreases current financial performance, it will boost future financial performance. This relationship is observed among firms that participate in an ETS. This study extends the understanding of the relationship between ETSs, corporate carbon proactivity, and corporate financial performance. It also provides evidence on how to improve the ETS mechanism.