International ETS and Physical Climate Risks

The Emissions Trading System (ETS), modeled after the Kyoto Protocol, is widely recognized for its role in advancing the sustainable development goals (SDGs). However, this market-based mechanism has been criticized from a Keynesian perspective, which highlights that investment inertia in technology and climate governance can impede effective climate risk management. To address this debate, this study constructs a novel conceptual framework integrating institutional theory and the resource-based view. Employing a staggered difference-in-differences (DID) design with global data from 2000 to 2023, we empirically examine the complex relationship between ETS and physical climate risk. The results indicate that: First, the ETS, as a substantive climate governance tool driven by public pressure, significantly reduces physical climate risks, particularly acute climate risks. Second, the ETS governs climate risk primarily through three pathways-climate mitigation, adaptation, and finance-while also exhibiting spillover effects and threshold characteristics. Additionally, the effectiveness of the ETS is influenced by ideological and economic alignments, with notable variations among capitalist, non-EU, and non-OECD countries. Finally, high carbon prices, taxes, and allowances cause imbalances in the carbon market. This study not only provides a comprehensive explanation of the underlying mechanisms through which the ETS affects physical climate risk but also offers theoretical insights and empirical support for ETS optimization and the design of other climate policies.