Can a carbon emission trading scheme generate the Porter effect? Evidence from pilot areas in China

Abstract

“Kyoto Protocol” states that carbon market is one of three private emission-reduction instruments. Since 2013 China implemented carbon emission trading scheme (ETS) in seven provinces or cities. The purpose of this paper is to investigate whether the implementation of ETS can result in the Porter effect. Based on the Porter hypothesis theory, this study employs the difference-in-difference (DID) method and the improved DEA model to analyze whether ETS can bring economic dividend and environmental dividend. The empirical results specify that in the short term, ETS can significantly reduce carbon emissions in the pilot provinces, but fail to increase GDP. Therefore, ETS does not realize the Porter effect in the short term. Nevertheless, in terms of the empirical results we can find ETS plays a significant role in emission reduction. In the long term, ETS can stimulate sustainable economic dividend and environmental dividend, and achieve the Porter effect. From the test results, we can find ETS has good economic and emission reduction functions. ETS achieves the Porter effect in the long term but not in the short term. In order to achieve the Porter effect from ETS successfully, a sound carbon emission trading scheme must be established to ensure efficient carbon emission trading market.