Emissions Trading Scheme Research Articles

Carbon emissions trading, industrial structure upgrading and green development: Excess benefits of combined actions

Clarifying the influence mechanisms of carbon emissions trading scheme (ETS), industrial structure upgrading (ISU), and green development is of great theoretical and practical significance. Existing studies have only focused on the role of ETS or ISU on green development and have not included them in an analytical framework. The DID model and the moderating effect model are therefore combined in this work to to explore how the ETS will affect the link between ISU and green development throughout the period of 2008 to 2019 using panel data from 271 Chinese cities. Through a series of robustness and endogeneity tests, we find that: (1) ETS can significantly moderate the U-shaped relationship between ISU and green development, and this impact is significant in both the long and short term; (2) When ETS and ISU are implemented at the same time, the effect of the combined actions is greater than the sum of the effects of the two policies implemented separately, which means that the combined actions has excess dividends; (3) ETS and ISU have significant direct effects and spatial spillover effects on green development, and the excess dividends of combined actions also exist significantly at the spatial level. The research results of this paper provide an important theoretical and empirical basis for establishing the combined actions of ETS and ISU.

Testing mechanisms through which China's ETS promotes a low-carbon transition

China regards an emission trading scheme (ETS) as the most promising approach for reducing its carbon dioxide emissions. However, there are still disagreements about the effectiveness of China's ETS (CETS). To settle this issue, we test the impact of CETS on key mechanisms driving a low-carbon transition. We use the difference-in-difference method to analyze data for coal-power plants participating in China's carbon trading pilot. This involves the use of two variables based on life-cycle indicators, namely ‘energy return on energy invested’ (EROI) and ‘energy return on carbon invested’ (EROC). We obtain three main findings: (1) a mediating effect of supply-side reform is significant; (2) this effect is stronger for more intense technological innovation and government intervention; (3) the influence of CETS on a low-carbon transition is independent of the development of clean energy. Overall, we conclude that the scope of CETS should be extended to other emitters to fully unleash its potential for reducing carbon emissions.

Untangling the entanglement of US monetary policy uncertainty and European natural gas and carbon prices

Owing to the Russia–Ukraine conflict, the price of natural gas in Europe fluctuated significantly in recent years. As natural gas in Europe is highly dependent on imports, import prices are inevitably affected by monetary policy uncertainties. Additionally, monetary policy uncertainty has a significant impact on financial markets. As a unique financial market, the carbon market is affected by monetary policy uncertainties, but the mechanism of the impact is not yet clear. Therefore, we conduct a systematic study of the relationships between monetary policy uncertainty, European imported natural gas prices, and carbon prices in the last three phases of European Union emission trading scheme. This study uses the dynamic conditional correlation generalized autoregressive conditional heteroskedastic (DCC-GARCH) model and nonlinear auto-regressive distributed lag (NARDL) model to comprehensively analyse the correlation between these three variables, including volatility correlations and trend correlations. The results show that the dynamic conditional correlations between carbon and gas prices are mostly positive, as is the dynamic conditional correlations between natural gas prices and monetary policy uncertainty. However, the dynamic conditional correlations between carbon prices and monetary policy uncertainty gradually decreases and changes from positive to negative in 2015. In addition, the findings indicate the asymmetry of the short-term impact and long-term impact of monetary policy uncertainties and imported natural gas prices on the carbon prices trends. Monetary policy uncertainty has asymmetric effects on carbon prices in each phase of the research. However, the natural gas prices have asymmetric effects only in Phases 2 and 4. Based on the findings, some policy proposals are provided for the development of the carbon markets.

Power play in carbon trading market: How status of executives with R&D background incentives companies’ low-carbon innovation

Utilizing the phased initiation of carbon trading pilot projects in eight provinces and municipalities in China from 2013 to 2016 as a quasi-natural experiment, this study matches micro-level data on low-carbon patents and financial information of publicly listed companies from 2009 to 2019. Employing a staggered difference-in-differences framework, it assesses the impact and mechanisms through which the distribution of executive power, among those with R&D backgrounds, influences firms' low-carbon innovation capabilities against the backdrop of a carbon emission trading scheme. The status of executives with R&D backgrounds is characterized by their relative ranking within the team, as denoted in the companies' financial statements. Findings indicate that the carbon emission trading significantly fosters the output of low-carbon patents by firms, with executives possessing R&D backgrounds further enhancing the level of low-carbon innovation. This effect is more pronounced in privately-owned and small to medium-sized enterprises. Further analysis suggests that increasing R&D investment and personnel ratios, correcting managerial overconfidence and myopia, and enhancing corporate attention to green strategies are channels through which R&D-oriented executives lead to an improvement in firms' low-carbon innovation capabilities. The paper proposes government tax incentives and funds for R&D staff, stricter ESG standards for executive accountability, and regulations mandating green goals in company planning.

Model-driven multimodal LSTM-CNN for unbiased structural forecasting of European Union allowances open-high-low-close price

European Union allowances (EUAs), the “currency in circulation” of the EU Emissions Trading Scheme (ETS), have spawned a great deal of speculative trading. This study proposes a model-driven long short-term memory network (LSTM)-convolutional neural network (CNN) hybrid model that integrates numerical data features and candlestick features to achieve accurate and unbiased structural prediction of EUA futures open-high-low-close (OHLC) prices during the four phases of the EU ETS. During EU ETS Phase IV, the out-of-sample prediction outcomes of the LSTM-CNN model exhibited a mean absolute percentage error (MAPE) of 0.942%, a mean absolute error (MAE) of 0.877, a root mean squared error (RMSE) of 1.157, a goodness-of-fit (R2) of 0.953, an accuracy ratio (AR) of 0.544, and a forecast correct rate of ups and downs (UP) of 0.579. In comparison to Naive methods, vector autoregression (VAR) combined with vector error correction model (VECM), multiple linear regression (MLR), partial least squares (PLS), support vector regression (SVR), and standalone LSTM, the LSTM-CNN approach demonstrated a notable enhancement in the average MAPE across the four stages of the EU ETS—specifically, an improvement of 21.66%, 43.15%, 15.73%, 15.72%, 10.45%, and 5.91%, respectively. Drawing from the unbiased structural forecasts of OHLC data, this study proposes fruitful intraday trading strategies that attain substantive investment returns in the realm of EUA futures trading. The multimodal forecasting methodology and intraday trading strategies advanced in this study hold considerable promise within the domain of energy finance.

Life expectancy and emission trading scheme: a case study in China.

Life expectancy can reflect both health benefit and implementation cost of climate policy. Nevertheless, little research has quantified the relation between life expectancy and climate policy in literature. In this paper, we attempt to narrow the research gap by studying how life expectancy is related to the Chinese nationwide emission trading scheme (CNETS). To achieve this research target, a Computable General Equilibrium (CGE) model is employed to simulate the operation of the economic system and the policy shock from emission abatement. The CGE model results show that life expectancy is prolonged by GDP but shortened by emissions, and the GDP impact on life expectancy is larger than the emission impact. Climate policy has dual effects on life expectancy because it relieves both negative emission impacts and positive GDP impacts on lifespan; its net effect on life expectancy is positive. Life expectancy positively impacts GDP, and this impact is moderated by climate policy; specifically, climate policy reinforces the positive impact of life expectancy on GDP. Life expectancy minimally affects carbon emissions during climate policy implementation; in other words, it has minimal impacts on emission abatement. These findings imply that climate policy and life expectancy complement each other; the government could implement climate policy to increase lifespan or prolong life expectancy to facilitate policy implementation.

When and Under What Conditions Does an Emission Trading Scheme Become Cost Effective?

This paper studies when and under what conditions the actions undertaken by the power plants involved in China’s emission trading scheme (ETS) pilot became cost effective. Based on unique plant-level panel data and the difference-in-differences strategy, we identify that an insignificant initial reduction in cost efficiency occurred at the announcement stage for power plants in the pilot provinces; however, the cost efficiency of the pilot plants increased significantly following formal policy implementation. Additionally, the by-stage treatment effects differed across the pilot provinces due to localized market and non-market variations. Localized conditions of higher marketization, stricter policy enforcement, and lower carbon dependence enhanced this positive effect. The synthetic control results confirmed this variation in the policy effects. The carbon trading pilots resulted in improved efficiency in power plants in Shanghai, Guangdong, and Tianjin during the period 2013–2017, with an associated total cost saving of approximately 29.75 million RMB. To enhance the efficacy of the ETS policy, our findings suggest that the design of the policy should consider localized external factors.

Role of risk aversion in operational decisions with remanufacturing under emissions price volatility

Previous studies have extensively investigated the optimal operational decisions for firms under emission trading scheme, assuming a constant emissions price. However, the volatility of the emissions price has always been ignored, leaving the resulting operational decisions unclear for risk-averse firms. In this paper, we examine the impacts of risk aversion in the presence of emissions price volatility. Specifically, we investigate a risk-averse firm that strives to reduce associated costs through emissions abatement under emissions price volatility. The firm sells both new and remanufactured products. To illustrate the role of risk aversion, we sequentially examine risk-neutral and risk-averse scenarios using the mean–variance criterion as the risk aversion measurement. Among other results, we demonstrate that the risk-averse firm has incentives not only to remanufacture all used products, but also to increase the remanufactured quantity under certain conditions. Surprisingly, we find that risk aversion may not always hinder investments in emissions reduction. Subsequently, we discuss how risk aversion influences consumers and the environment, using the life cycle analysis-based approach to model environmental impacts. The results indicate that as the degree of risk aversion increases, consumers are worse-off, and there is a constant conflict between economic and environmental objectives. Additionally, it is interesting to find that the emission abatement investment strategy does not necessarily improve environmental benefits.

Emission trading schemes and cross-border mergers and acquisitions

The Emission Trading Scheme (ETS) provides a market mechanism to mitigate carbon emissions and has been introduced in many countries. Its fundamental idea is to make carbon emissions costly. Consequently, firms undertaking cross-border expansions may have to consider this extra cost when entering markets with an ETS. They may avoid these countries or relocate their investment to countries without an ETS. Using a large sample of international firms between 2002 and 2019, we investigate this issue via a difference-in-difference approach. Our results show that ETS implementation leads to significantly less cross-border merger and acquisition (M&A) deals in the host countries, indicating an avoidance effect or potential carbon leakage. Further analysis reveals that ETS implementation decreases firms’ financial performance and increases market risks, both contributing to cross-border M&A decisions. We demonstrate strong evidence of cross-sectoral differences, where carbon-intensive sectors tend to bear higher costs. This study contributes to the environmental economics and finance literature and provides evidence with policy relevance.

The impact of the carbon trading market on urban coordinated development in China.

Evaluating the effects of China's carbon emission trading scheme (ETS) is crucial for the coordinated development of Chinese cities. Therefore, based on the panel data of 242 cities in China from 2008 to 2019, this paper uses the multi-period difference-in-difference (DID) model to comprehensively evaluate the impact of carbon market on the coordinated development of cities from the perspectives of carbon market policy and carbon market efficiency, and then analyzes the mechanism and heterogeneity of the effect of carbon market efficiency. The results show that both carbon market policy and carbon market efficiency can promote the coordinated development of cities. Science and education expenditure plays a significant intermediary role in the impact of carbon market efficiency on the coordinated development of cities. The heterogeneity test finds that the stricter the performance penalty system, the higher the level of urban coordinated development, and the stronger the effect of carbon market efficiency. The findings of this paper provide policy recommendations for further improving the construction of China's pilot and national ETS and enhancing the coordinated development of Chinese cities.

A novel optimization method of carbon reduction strategies implementation for industrial parks

The effects of various energy conservation and carbon reduction (ECCR) strategies can differ significantly despite equal investment. Given limited amount of capital expenditure, managers and planners of industrial parks must carefully select from different ECCR strategies and implementation technologies to maximize investment returns. This study establishes mathematical models for four ECCR strategies: forestry carbon sequestration (FCS), carbon capture and utilization (CCU), waste heat recovery (WHR), and photovoltaic (PV). A universal ECCR planning optimization model is constructed to maximize annual economic benefits or carbon emission reduction. Using an industrial park in southern China as a case study, genetic algorithms are utilized to solve the model and validate its feasibility. The study analyzes three key parameters: capital expenditure caps, carbon trading price in the Emission Trading Scheme, and transportation distance of captured CO2 products for sensitivity. The results demonstrate considerable economic benefits of the CCU strategy when demand matches appropriately. However, in cases with limited capital expenditure, implementing small-scale FCS strategies in industrial parks is not advisable from both an economic and environmental perspective.

Assessing capital allocation efficiency under environmental regulation

Utilizing data from 2010 to 2021 from listed firms, this study examines the relationship between environmental regulation and capital allocation efficiency. The empirical findings reveal that the implementation of carbon emissions trading scheme pilots plays a pivotal role in diminishing capital misallocation within firms. This effect is more pronounced in state-owned enterprises, firms facing high financial constraints, those operating in highly competitive markets, and organizations that are not part of the high-tech or high-pollution industries. These findings highlight the significant role of macro-level environmental regulations in improving micro-level organizational capital efficiency.

The impact of market-based environmental regulation on corporate ESG performance: A quasi-natural experiment based on China's carbon emission trading scheme

At present, there are few studies exploring the impact of market-based environmental regulation on ESG performance based on the perspective of carbon emission trading scheme (CETS). This paper aims to supplement this research field through empirical analysis. Taking Shanghai-Shenzhen A-share listed companies from 2012 to 2022 as the research object, this paper studies the impact of CETS, a market-based environmental regulation tool, on the ESG performance of enterprises by constructing a time-varying DID model and examines the mediating roles of green technology innovation, agency cost and analyst attention. The results show that the implementation of CETS can significantly boost ESG performance, and green technology innovation, agency cost, and analyst attention play a partial intermediary role between the two, while the mediating effects of green total factor productivity and green total factor energy efficiency are not significant. In terms of heterogeneity analysis, the study shows that CETS implementation has a more substantial promotion effect on ESG performance in non-state-owned enterprises, non-politically connected enterprises and non-high-tech enterprises. In this paper, the robustness test was carried out through PSM-DID, placebo test and replacement of explained variables, and the test results further supported the hypothesis in this paper. This study enriched the research on the impact of market-based environmental regulation on ESG from the perspective of CETS. It provided enlightenment for enterprises to improve ESG performance to a strategic level, improve the level of green technology innovation, and the government to implement differentiated environmental governance policies.

Carbon emission trading, technological progress, synergetic control of environmental pollution and carbon emissions in China

This study introduces three production technology shocks (Energy manufactures, Brown enterprises, and Green enterprises) by constructing different models, namely, the environment sector (baseline) model, the carbon emissions trading scheme (ETS) model, and the carbon emissions rights trading mechanism. The fluctuation trend of China's macroeconomic and environmental quality before and after the establishment of carbon market is compared and analyzed. Additionally, the study examines the welfare of the implementation of carbon market policies. The carbon trading market policy can promote the synergistic efficiency of China's pollution reduction and carbon reduction using energy and green production technologies. From the perspective of social welfare, the optimal range of the initial carbon quota ratio issued by the government to enterprises is [0.7,0.8]. The findings of this study provide theoretical support and contribute toward understanding the impact mechanisms of carbon market and technological progress on synergizing the reduction of pollution and carbon emissions in China.

Heterogeneous environmental consciousness, carbon permit adoption, and endogenous growth: A case of China

Motivated by low participation rate in China’s pilot Emission Trading Schemes (ETS), yet there being ample empirical evidence of carbon permit activities having an impact on firms’ technological innovation choice, we develop a novel endogenous growth model with carbon accumulation where both the green behaviors of non-corporate individuals and carbon permit adoption choice of corporate owners are influenced by heterogeneous environmental consciousness. Calibrated for China based on ETS price data, we examine the impacts of both long-run policy experiments and short-run cyclicality associated with carbon permit prices. we find that long-term greater ETS trading affordability would incentivize more firms to participate and bring about a reduction in carbon ratio, though it is still largely bounded by the conventional environment-growth trade-off that it requires supplementing it with other policies. In the short run, we find that higher carbon permit trading price would be procyclical to economic expansion but at the cost of environmental degradation too. In combination, this presents a policy dilemma: while improving ETS trading affordability is a long-run policy priority in China, in the short-run, absent fundamental changes, the procyclicality between carbon permit price and economic growth would serve as counteracting forces to this.

The impacts of carbon emissions trading scheme on green finance: evidence from China.

China enacted and implemented a carbon emissions trading pilot policy in 2011, and whether this carbon emissions trading scheme (ETS) can promote the development of green finance is crucial to realizing a win-win situation for both environmental and economic performance. Based on the panel data of 30 provinces in China from 2007 to 2019, this study constructs a multi-period double-difference model (DID) to explore the impact of carbon ETS on the development of green finance and uses the spatial Durbin model (SDM) to test whether there is a spatial spillover effect of the carbon ETS on the development of green finance. The results show that (a) the implementation of carbon ETS significantly promotes the development of green finance, and this conclusion still holds through a series of robustness tests; (b) the promotion effect of the carbon ETS on the development of green finance is more significant in eastern and western provinces, non-resource-based provinces, and provinces with a high level of openness to the outside world; (c) industrial structural upgrading and green innovation play pivotal roles in achieving the desired outcomes of carbon ETS; (d) carbon ETS have spatial spillover effects on the development of green finance, with the indirect effects being more significant than the direct effects. The findings of this study can serve as a valuable reference for expediting the establishment of a unified national carbon market and the development of a robust green financial system. This holds immense significance in effectively implementing the "dual-carbon" strategy.

Greening your way to profits: Green strategies and green revenues

We examine hot-debated but underexplored questions of whether and how green strategies affect corporate green revenues. Using a generalized Difference-in-Differences (DiD) framework, we find that green strategies significantly enhance corporate green revenues in the presence of China's Emission Trading Scheme (ETS) pilot. This is consistent with the Porter Hypothesis. Our mechanism analyses document that green strategies increase green revenues by improving green quality and catalyzing environmentally friendly transformation. This study has important implications for policymakers and practitioners, offering new insights into the intended consequences and real outcomes of environmental regulations.

Do China's pilot emissions trading schemes lead to domestic carbon leakage? Perspective from the firm relocation

The limited geographical coverage of pilot emissions trading schemes (ETS) raises domestic carbon leakage risks. Since relocation represents a primary channel that causes carbon leakage, this paper investigates the impact of China's pilot ETSs on firms' cross-provincial relocation with a method combining propensity score matching and staggered difference-in-differences. The empirical results, based on the data of Chinese listed industrial firms from 2009 to 2020, show that the ETS has accelerated firm relocation by increasing negative attention and social capital investments. According to the threshold analysis, firms with sufficient abatement efforts do not undertake relocation strategies. The theoretical analysis can also be confirmed by further investigations on the price signal distortions and the negative impact of relocation on carbon prices. Moreover, the study also demonstrates the heterogeneous effects across firm characteristics, industry types, and policy design features. Overall, these findings provide a reference for China's government to prioritize the establishment of domestic leakage prevention mechanisms for ETS.

Faking for fortune: Emissions trading schemes and corporate greenwashing in China

Market-based environmental regulations are pivotal in facilitating the reduction of emissions. This paper employs a staggered difference-in-differences (DID) strategy to investigate the impact of Emissions Trading Schemes (ETS) on corporate greenwashing behavior. The findings suggest that ETS act as a catalyst for corporate greenwashing by intensifying financial distress, as demonstrated that the effect is notably more substantial among firms with heightened financing constraints and greater performance volatility. Further analysis reveals that corporate greenwashing behavior induced by ETS is more pronounced where market competition is higher, firms are smaller, R&D investment is lower, or intensity of environmental regulation is lower. This paper provides valuable insights for understanding the comprehensive picture of ETS.

Computable general equilibrium analysis of neutral carbon trading scheme and revenue recycling impacts on income distribution in China

Utilizing a dynamic computable general equilibrium (CGE) model, this paper critically assesses the potential distortions and efficacy of various revenue-neutral carbon emission trading schemes (ETSs) in China, through government subsidies and value-added tax (VAT) relief strategies aimed at achieving peak carbon emissions before 2030. The analysis reveals that reallocating market revenues to the production sector, either through government subsidies or VAT reductions, can feasibly attain carbon peaking before 2030, with minimal impact on GDP. Notably, both government subsidies and VAT cuts foster output growth in the oil, gas, and ETS-covered sectors. Moreover, directing carbon market revenue toward ETS-covered industries via VAT relief emerges as the most effective approach to reducing income disparities. In contrast, redistributing carbon market revenue to non-ETS-covered industries via VAT relief is found to be the least effective in promoting social equity. The study emphasizes that the reallocation of carbon market revenues to ETS-covered sectors is paramount. This strategy not only regulates the overall energy consumption effectively but also steers the nation towards a more sustainable and optimized energy consumption pattern. In light of these findings, this paper offers detailed insights and tailored policy recommendations, aiming to assist policymakers in striking a balance between environmental goals and economic and social imperatives.