Does Cap-and-Trade Scheme Impact Energy Efficiency and Firm Value? Empirical Evidence from India

Governments worldwide have adopted environmental regulations to fight global warming. In 2012, the Government of India introduced the Perform, Achieve and Trade (PAT), a cap-and-trade scheme 2012 to achieve energy efficiency for large-sized industries. The extant literature is divided on the impacts of environmental regulations on firm performance. While Porter & Van der Linde, (1991) 'win-win' argument proposes a positive effect, the 'cost-regulation' theory suggests a negative impact. Against this backdrop, we examine the effects of the PAT scheme on energy efficiency and firm value. We employ difference-in-differences (DID) combined with a matching technique on firm-level data from 2006 to 2015. We do not find evidence of the PAT scheme effectively enhancing a firm's energy efficiency; however, the study reveals that the scheme adversely affects firm value. Furthermore, we find that increased expenditure on repair and maintenance, research and development, rising plant and machinery purchases, and a fall in productivity are the potential reasons for the decline in firm value post-PAT period. Our results are robust to alternative definitions of energy intensity, firm value, and empirical specifications