Command thy blessing from above: vertically delegated carbon reduction targets and firm export performance in China

In large countries with complex political hierarchies, environmental regulations are often implemented in a top-down manner, sparking debates about the effectiveness of such environmental governance. This paper investigates how regional carbon reduction targets in China, which are vertically delegated by higher-level governments, affect firms' export performance. Using a detailed firm-by-product level dataset, we employ a difference-in-differences approach, enhanced by the use of an instrumental variable exploiting exogenous variation in carbon reduction targets arising from regional differences in the average target of surrounding cities, to isolate the causal relationship. We find that every percentage point increase in a city's CO2 reduction target leads to a 1-2% decrease in the exports of firms within the jurisdiction. Furthermore, this observed effect is more pronounced among state-owned firms, high-carbon firms, and firms located in Export Policy Zones, and is weaker for shipments to destinations with stricter environmental regulations. Our findings depict a negative trade effect of emission regulations, pointing to the necessity of a careful overhaul of the economic costs associated with the country's command-and-control path towards achieving environmental targets.