This non-technical summary analyzes the impact of emissions trading systems on the productivity of manufacturing establishments in Japan, examining how environmental regulations affect business performance.
Emissions trading systems (ETS) aimed at reducing greenhouse gas emissions are employed as useful policy tools for promoting decarbonization in many countries and regions. However, since the introduction of environmental regulations directly impacts corporate management activities, sufficient verification is needed regarding how ETS affects corporate management and establishment performance. ETS targeting greenhouse gases particularly requires CO2 emission reductions directly related to product manufacturing, raising concerns about significant impacts on corporate and manufacturing establishment management.
This study analyzes the impact of the emissions trading systems implemented in Tokyo and Saitama (Tokyo-Saitama ETS) on the total factor productivity (TFP) of targeted manufacturing establishments, based on establishment survey data from the Census of Manufactures and Economic Census. Using panel data of manufacturing establishments from 2002 to 2016, the study estimates TFP for periods before ETS introduction, during the announcement period (Tokyo: 2007-2009, Saitama: 2008-2010), and after ETS implementation (Tokyo: from 2010, Saitama: from 2011).
The analytical framework designates Tokyo-Saitama ETS target establishments as the treatment group and non-target establishments as the control group. For more robust verification, the study employs Staggered Difference-in-Differences (DiD) analysis of establishment TFP changes and robustness checks to confirm the validity of the change factor analysis. This statistically verifies how manufacturing establishment TFP was affected by ETS introduction and implementation processes.
Trend analysis of average TFP for target and non-target establishments shows that until 2010-2011 when the Tokyo-Saitama ETS began, TFP changes and trends for both treatment and control groups exhibited similar movements. However, after ETS introduction, the average TFP of the treatment group showed an increasing trend compared to the control group. This result suggests that Tokyo-Saitama ETS introduction may have improved TFP at ETS target establishments.
During the announcement period when system introduction was announced (Tokyo: 2007-2009, Saitama: 2008-2010), TFP changes at ETS target establishments showed no statistically significant difference from non-target establishments. This indicates that the system announcement itself did not immediately produce productivity improvement effects. Companies likely waited to understand the detailed system design and actual operational methods before implementing full-scale response measures.
After system implementation, target establishment TFP showed significant improvement compared to non-target establishments. Particularly during the first reduction planning period (Tokyo: 2010-2015, Saitama: 2011-2015), ETS target establishments demonstrated TFP improvements. This suggests that once ETS operations actually began, target establishments intensified efficiency efforts toward achieving specific reduction targets.
Additional analysis to clarify the mechanisms behind TFP improvements at ETS target establishments revealed that investments in machinery and equipment at ETS target establishments decreased more than at non-target establishments after ETS implementation. This interesting finding indicates that CO2 emission reductions and productivity improvements were not simply achieved through tangible investments in energy efficiency and decarbonization at target establishments.
Despite reduced investments in machinery and equipment, the productivity improvements suggest possible investments in intangible assets (system improvements for energy efficiency and decarbonization) or efforts to improve energy efficiency and achieve decarbonization through means other than capital investment. This suggests that ETS prompted companies to pursue different innovation directions, achieving productivity improvements through more efficient production process construction and operational management improvements.
Consistent with verification results from EU and other ETS studies, the analysis shows that ETS can potentially improve productivity at target establishments in Japan as well. Environmental regulation implementation generally raises concerns about burdening corporate management and reducing international competitiveness. However, these results provide important evidence that appropriately designed emissions trading systems can simultaneously achieve environmental goals and improve economic efficiency.
The analysis results of the Tokyo-Saitama ETS, which has been implemented ahead of other regions in Japan, provide important policy implications as full-scale preparation of a nationwide ETS for decarbonization progresses. This research demonstrates that environmental policies do not necessarily compromise economic efficiency and that environmental protection and economic growth can coexist under appropriate system design. These insights will serve as important references for system design in future national-level carbon neutral policies and Green Transformation (GX) promotion.