Foreign demand shocks and CO ₂ emission intensity: firm-level evidence from China

Constrained by data availability and challenges in causality identification, the relationship between trade and the environment remains theoretically ambiguous. This paper constructs a novel Chinese manufacturing firms' CO2 emission intensity dataset by converting different types of firms' energy consumption. Using disaggregated transaction data and the Shift-Share design, this paper exploits the effects of foreign demand shocks on firms' CO2 emission intensity from 2007 to 2014. We document that a 10% increase in foreign demand leads to a 0.28% reduction in firms' CO2 emission intensity. We find that multi-product exporters can benefit more from foreign demand shocks, and further prove the absence of CO2 leakage due to the EU ETS. This paper demonstrates that firms can be beneficiaries of foreign demand shocks, unmasking the trade-environment nexus by providing micro evidence from the largest developing country.