Assessing the environmental effect of China's carbon emissions trading scheme: Firm-level evidence from thermal power plants

China plans to achieve carbon peaking by 2030 and carbon neutrality by 2060. The cap-and-trade emissions trading scheme (ETS) has been implemented in China to achieve its CO₂ emission targets. Using detailed data from thermal power plants from 2006 to 2021, this paper assesses the environmental effects of ETS. The difference-in-differences (DID) regression model is utilized to evaluate the policy impacts. We have the following findings. (1) The ETS not only significantly reduced CO₂ emissions, but also achieved the additional goal of reducing atmospheric pollutant emissions. Therefore, the policy has a marked environmental impact. (2) The mechanism analysis indicates that the ETS regulated power plants through price and trading volume signals. The environmental effects are achieved through reducing fossil fuel usage and driving the transition of the energy structure toward cleaner energy. (3) Further analysis indicates that the ETS has produced beneficial inter-regional spillover effects and that there is no evidence of cross-regional shifts in power generation or energy usage, or of CO₂ emission transfers within power groups. Based on the research results of our study, practical implications are discussed.