Beggar-thy-neighbor: Carbon leakage within China's pilot emissions trading schemes

Abstract

The differences in the market liquidity of eight pilot emissions trading schemes (ETS) and the economic development of cities within the provincial-level ETS raise carbon leakage risks among the pilot cities. Utilizing panel data and DID models for 266 prefecture-level cities in China from 2006 to 2019, the empirical analysis reveals several key findings. Firstly, at the provincial level, the Tianjin pilot is found to have significantly increased CO2 emissions, potentially linked to carbon spillover from Beijing. Additionally, at the prefecture-level city level, certain cities in Guangdong Province and Fujian Province exhibit significant increases in CO2 emissions, indicating carbon transfer within the pilot ETSs. Secondly, all three spatial spillover effect tests demonstrate a notable carbon spillover effect between pilot cities. Lastly, the analysis of the moderating effect suggests that administrative intervention within the ETS and market mechanisms have limited impact on carbon spillover between pilot cities, while administrative intervention outside the ETS significantly enhances carbon leakage between pilot cities, primarily driven by carbon transfer resulting from state-owned enterprises' support for government emission reduction actions.