The effectiveness of carbon emission trading system: Evidence from China's regional markets

Abstract

This paper evaluates the effectiveness of China's regional carbon markets, which in 2018 covered 692 million tons of carbon dioxide emissions, over 40 % of the coverage of the European Union's ETS. Utilizing a comprehensive city-level panel and synthetic difference-in-differences estimation, we find that China's regional ETSs significantly reduced carbon emissions without negatively impacting city-level economic activities, as measured by nighttime lights and firm-level revenue and profit. This suggests that carbon mitigation can occur alongside economic growth. Emissions reduction was achieved through broad structural transformation and green technologies adoption, rather than green innovation. Effects are more pronounced in regions with greater power sector competition and stronger local state capacity. Finally, we find no evidence of carbon leakage to neighboring areas or to cities with close production ties to ETS cities.