Assessing the effectiveness of emissions trading schemes: evidence from China

Xueping Wu, Wenhai Qiu and Shihong Guo

Climate Policy, 2024, vol. 24, issue 4, 545-557

Abstract: The effectiveness of carbon price in emissions trading schemes (ETS) is an important issue in China in the context of its ambitious climate change goals. This paper adopts a staggered difference-in-differences model to estimate whether China’s ETS reduced CO2 emissions while maintaining economic growth even under low carbon prices. The results indicate that despite the low carbon prices, the ETS effectively reduced CO2 emissions without undermining the economy. Specifically, an increase of $1 in the carbon price reduced CO2 emissions by 1.69% and increased the per capita GDP by $286. The carbon price primarily achieved emission reduction and promoted economic development through channels, such as technological innovation, foreign direct investment, energy mix, and industrial structure. Carbon leakage to neighboring regions was not evident. Heterogeneity analysis showed that the environmental effects of the carbon price were more pronounced in regions with higher levels of economic development and CO2 emissions. Conversely, the economic effects of the carbon price were more pronounced in regions with lower levels of economic development and CO2 emissions. The carbon price achieved significant economic effects in regions that solely adopted the free allocation mode of emission allowances, while regions that used a combination of free allocation and auctioning experienced substantial emission reduction effects.Despite low carbon prices, China’s ETS effectively reduced CO2 emissions without compromising economic growth. This finding provides new empirical evidence for the effectiveness of carbon price as well as decision support for the future promotion of ETS.Technological innovation, FDI, energy mix, and industrial structure are crucial channels through which the carbon price achieves emission reduction and promotes economic development.The absence of carbon leakage to neighboring regions suggests that ETS is an internally effective mechanism for emission control.Heterogeneity analysis showed that regional characteristics and allowance allocation modes can influence the effectiveness of carbon price, thus emphasizing the importance of targeted policy design and appropriate allocation methods.

Date: 2024
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DOI: 10.1080/14693062.2023.2282481

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