The impact of China's pilot carbon ETS on the labor income share: Based on an empirical method of combining PSM with staggered DID

The carbon emissions trading scheme (ETS), which restricts carbon emission permit allowances, affects firms' decisions on labor and capital use in production. Taking China's ETS as a quasi-natural experiment and using firm-level panel data from 2009 to 2019, this study evaluates the impact of China's pilot carbon ETS on the labor income share. We adopt the Propensity Score Matching combined with Staggered Difference-in-Differences method, allowing considerable treatment effect heterogeneity. The estimated results of the overall treatment effect show that China's pilot carbon ETS significantly increases the labor income share. When we consider the treatment effect heterogeneity across calendar time, entry cohort, and length of policy exposure, most coefficients remain significantly positive. These findings provide initial empirical evidence that climate policy may help reduce excessive dependence on capital and fossil energy, thereby alleviating the global trend of declining labor income share. •Our study untilizes the empirical analysis that combines PSM with staggered DID.•China's pilot carbon ETS significantly increases the labor income share.•Our results still hold even after considering for various sources of treatment effect heterogeneity.•Pilot firms in China's carbon ETS enhance labor income share through hiring more labor and reducing capital investment.