Examining seven regional Emission Trading System (ETS) and the national ETS in China, we explore the interplay between corporate behavior and carbon policies. We find that only firms expecting stringent carbon policies proactively reduce emissions, invest more in decarbonization technology, and observe carbon premium, but expectations of weaker policies lead to increased emissions. Cap-and-trade reduces both emission levels and intensity while tradable performance standards only reduce emission intensity. Carbon markets do not negatively affect corporate production. Our findings underscore the importance of strategic interactions between firms and governments in achieving effective carbon reduction outcomes.
