Does environmental regulation promote energy market integration? Evidence from China’s carbon emission trading pilot

Shaozhou Qi, Wenna Zhang, Kai Li, Xinqiang Li and Zhipeng Gui

Climate Policy, 2025, vol. 25, issue 9, 1383-1396

Abstract: Establishing a unified energy market is an important way to achieve the security of the energy supply, improve energy efficiency, and reach carbon neutrality. This paper examines the impact of environmental regulation, represented by the carbon market, on the integration of the energy market. Using panel data from 30 provinces and municipalities in China from 2003-2021, we identify the impact of the carbon emission trading pilot policy on the level of energy market integration (EMI) through the staggered DID model. On this basis, the mechanism was further analysed, with heterogeneous effects from multiple perspectives. The results show that (1) the carbon emission trading pilot policy improved the regional EMI; (2) the carbon emission trading pilot policy intensified the level of competition in the energy market, reduced the government’s intervention, and promoted the development of innovation in clean energy technology, thus positively contributing to the EMI; and (3) the contribution of the carbon emission trading pilot policy to the EMI was heterogeneous. The carbon emission trading pilot policy has stronger marginal effects in regions with lower levels of development, and the policy effects are more pronounced in regions with more abundant clean energy resources. The enforcement of stricter environmental standards and improved information disclosure can help carbon markets exert a positive effect on EMI. Better levels of environmental infrastructure and the development of renewable energy infrastructure are necessary elements to ensure that the carbon market promotes EMI. This study provides key insights and policy implications to better promoting EMI and implement dual-carbon goals.Market-based environmental regulations, such as China’s carbon market, can be considered by governments as key tools in promoting energy market integration (EMI).Enhanced competition in the energy market, reduced government intervention, and increased development of clean energy are the primary reasons why carbon markets support EMI.Regional environmental standards should be strengthened, corporate transparency should be enhanced, and information disclosure improved to ensure the fairness and efficiency of the carbon trading market.Less developed countries can gradually implement carbon market policies, focusing on clean energy infrastructure and regional adaptation.Regional economic differences are considered when designing carbon market policies to ensure that they adapt to local market needs and development stages.

Date: 2025
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DOI: 10.1080/14693062.2025.2455090

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