Can we have the best of both worlds? The impact of emission trading system on carbon reduction and economic growth in China

This study investigates whether China's Emissions Trading System (ETS) can simultaneously achieve carbon emission reductions and economic growth—a dual objective often described as “having the best of both worlds.” Utilizing panel data from 2508 counties spanning 2000 to 2020, we treat the implementation of the ETS as a quasi-natural experiment and employ a staggered difference-in-differences (DID) approach to evaluate its effects. The results show that the ETS significantly reduces carbon emissions while promoting industry output, confirming the compatibility of environmental and economic objectives. Robustness checks confirm the stability of the estimates. Mechanism analyses reveal that the policy's success is primarily driven by technological innovation and enhanced environmental regulation. Heterogeneity analyses indicate that the ETS's effectiveness is more pronounced in cities with stronger industrial foundations, higher enforcement capacity, and those located in the Yangtze River Basin. This research contributes to the environmental economics literature by offering evidence at the county level and provides actionable policy insights for the design and regional tailoring of market-based environmental regulation tools.