Can market-oriented reform inhibit carbon dioxide emissions in China? A new perspective from factor market distortion

Abstract

Abstract To explore whether market-oriented reform can help reduce CO2 emissions, by adopting the spatial panel data model based on the provincial panel data of China during 2001-2017, this article empirically tests the impact of labor market distortion and capital market distortion on CO2 emissions. The main findings are yielded as follows. (1) The labor market distortion and capital market distortion are widespread in China. The high wages caused by the insufficient supply of labor and the low marginal output of labor due to the shortage of human capital stock are the main reason for the positive labor market distortion. The capital market distortion can be put down to the excessive interventions of the government on the allocation of capital. (2) The labor market distortion can enhance CO2 emissions, that is, promoting market-oriented reform in the labor market can curb CO2 emissions. (3) The connection between capital market distortion and CO2 emissions can be described as a U-shaped curve. The complete marketization of the capital market and excessive government intervention in the allocation of capital can both cause an increase in CO2 emissions. (4) Improving the marketization of the labor market is effective for reducing CO2 emissions in almost all provinces. In the central region, the capital market distortion can exacerbate CO2 emissions. However, in the western region, the governmental intervention on the allocation of capital can enable limited funds to more effectively move to environmentally friendly enterprises, and avoid these provinces becoming a pollution refuge. Based on these findings, this article goes into more detail on the policy implications.