The role of firm resources in environmental regulation: Evidence from the emission trading system in South Korea

Abstract A firm's response to regulations may depend on its resources, such as finance, human capital, facilities, information, patents, brand names, and organizational processes. This study aims to examine whether it is easier for firms with many assets to reduce CO2 emissions after an Emission Trading System in Korea (K-ETS). We make a firm-level dataset from 2011 to 2019 that includes CO2 emissions and financial information for manufacturing firms that have been subject to the K-ETS. We apply regressions and log mean divisia index (LMDI) to analyze the causes of and contributions to the change in CO2 emissions before and after the ETS. The panel analysis result shows that the more assets (or intangible assets including human capital, information, patents, or brand names) a firm owns, the lower the CO2 emissions after the ETS. It is also estimated that conglomerates, including interlocking affiliates, reduced CO2 emissions more than small and medium-sized enterprises (SMEs). As a result of LMDI analysis, we find that conglomerates with abundant resources reduced CO2 emissions by improving energy intensity through facility investment or process improvement, unlike SMEs. This result means that firms with many resources can positively respond to the ETS and the effect of resources was a spillover within the same interlocking group. Classification codes Q58 · Q54 · D22 · G38 · L25 · L60