Environmental and economic performance of China’s ETS pilots: New evidence from an expanded synthetic control method

Abstract

An emissions trading scheme (ETS) is widely regarded as a cost-effective instrument for curbing global climate change. In 2011, China, the world’s leading carbon emitter, introduced ETS pilots in seven cities/provinces. Subsequent studies have debated their effectiveness, especially in terms of their economic performance. This article investigates whether China’s ETS pilots have successfully balanced carbon emission reductions and economic growth. For this, we apply an extended synthetic control method for multiple treated units that relaxes the parallel trends assumption required by the difference-in-differences estimation commonly used in the field The results show that overall CO2 emissions decreased by approximately 1,165.72 Mt from 2011 to 2015, representing 12.78% of the pilot regions’ total industrial CO2 emissions. As for the ETS pilots’ economic performance over this period, we find that there was a loss in the value of industrial output totalling approximately RMB5,608.88 billion. That said, the economic loss was short term in nature and decreased over time. Regions showed heterogeneous responses to the ETS pilots. Although all of them experienced a decline in CO2 emissions, Beijing and Shanghai showed the fastest reduction, while Guangdong showed the largest reduction. Losses in industrial output were concentrated in Guangdong (RMB7,416.66 billion; 4.64% of the region’s total industrial output) and Shanghai (RMB701.28 billion; 4.08%); the other regions saw economic losses only in the first two years after ETS implementation. These findings suggest that policy makers should consider a gradual (rather than a radical) ETS policy and make firm subsidies part of their battery of instruments in the early stage of establishing a nationwide ETS.