Emissions Trading Scheme Pilots Research Articles

The role of imperfect market structure in the employment effect of emissions trading scheme in China: A theoretical extension and empirical investigation

The Chinese government aims to balance employment stabilization and emissions reduction when it initiates an emissions trading scheme (ETS) to control carbon emissions. However, the policymakers should not neglect the role of imperfectly competitive market structure and market power from incumbent firms. In view of this, classical framework of Berman and Bui's (2001) is extended in this paper to clarify the theoretical mechanism of employment effect of the ETS considering firm-level market power. In addition, based on the firm-level panel data from 2008 to 2019 of China, the employment effect of each pilot ETS is measured with the method of difference-in-difference-in-differences. Then a moderating effect model is established to verify the role of firm-level market power on the heterogeneous employment effect among the pilot ETSs. Moreover, the employment effect is further decomposed to evaluate the influential mechanism from the perspective of firms’ strategic behavior. It is found that there is negative employment effect of China's ETS policy, due to the significant moderating role of firm-level market power. This decrease in labor demand is mainly dominated by a negative output effect rather than a positive substitution effect because strategic allowance sellers with stronger market power tend to hire fewer employees to reduce carbon emissions by controlling production scale. However, the heterogeneity of policy effects resulted by market structure is also identified in different pilot regions. Employment dividend has been found in Beijing and Tianjin where strategic allowance buyers manipulate the carbon market and hire more employees to consolidate their market power. Therefore, policymakers should improve the design of the ETS to overcome the adverse employment effect duo to the region-specific market structure.

The impact of adjustment mechanisms on China’s ETS: lessons from the pilot programs

AbstractThis article examines the adjustment mechanisms which have been designed and implemented under China’s experimentations with its emissions trading scheme (ETS). In China, several ETS pilot programs have adopted these mechanisms in the process of cap setting, allowance allocation and price regulation to allow regulatory intervention at different stages of the ETS operation to ensure that particular regulatory objectives are going to be achieved. Using doctrinal analysis, this article provides some critical insights into the specific regulatory design of the flexible mechanisms in China. It highlights their impact on regulatory stability and on the credibility of the ETS program. Considering that the ETS pilots are designed for and operated at local levels for the purpose of testing regulatory design and implementation in order to inform the policymakers at the central government when designing the national scheme, the lessons learned from the ETS pilots with respect to the adjustment mechanism are critical to fulfilling this strategy.

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

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.

Regional regime-switching behavior of China’s carbon price during regional and nationwide emissions trading scheme pilots

Regional regime-switching behavior of China’s carbon price during regional and nationwide emissions trading scheme pilots

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.

Does Carbon Trading Lead to Green Technology Innovation: Recent Evidence From Chinese Companies in Resource-Based Industries

The carbon emission trading scheme (ETS) is critical to China's ability to reach the established carbon dioxide (CO₂) emissions reduction goal by 2030 and carbon neutrality by 2060. To determine whether the pilot ETS policy promulgated in China in 2011 has induced green technological innovation, we conducted a multidimensional empirical test to assess the financial and green patent licensing data of Chinese A-share (publicly listed) enterprises in Shanghai and Shenzhen from 2004 to 2019. Using a difference-in-difference model with robustness checks, we did not find that the pilot ETS has had green innovation effects on entire industries or all manufacturing. However, we did identify significant green innovation improvements in some resource-based industrial enterprises, and the promotion effect led to more green utility models than green invention patents. Furthermore, the policy's greatest green-innovation effects are reflected primarily in new patents/utility models for low-carbon, energy-saving, and alternative energy technologies, particularly among large and nonstate enterprises. The impact mechanism tests indicate that the pilot policy encourages green innovation primarily through four policy instruments: increasing benefit income for resource-based industrial enterprises, reducing financial constraints, granting subsidies, and increasing incentives for enterprise R&D. Therefore, this article not only confirms the effectiveness of carbon emission trading market policy, but also provides scientific guidance for the realization of green technology innovation.

Did carbon emission trading scheme improve energy use in China? An integrated approach based on SCM and threshold regression.

The analysis of energy use not only sheds light on lightening the increasing pressures from energy systems but also improves the flexibility and reliability of power systems. As the highest carbon emission country in the world, detailed evaluation of China's carbon emission trading scheme (ETS) on the energy use is sensitive to energy sectors and highlights the importance of energy utilization in current society. Yet, because of the presence of a possible discontinuity caused by policy implementation, this study uses synthetic control method (SCM) to confirm whether there is a cutoff for energy use after the ETS implementation. Furthermore, threshold regression model is integrated to estimate the causal relationship when there is a discontinuity. SCM is used to verify which has caused the discontinuity for threshold regression model, and threshold regression model is used to quantify and estimate the causal relationship which SCM cannot evaluate. Through the data analysis, it is found that ETS makes effect on energy use deduction in most of pilot ETS regions while the effect is affected by economic development, population, industry, and research. Some suggestions on how to reduce energy use conclude this paper.

Emissions Trading Scheme Brings Transition Risks to Industrial Supply Chain in China

ABSTRACT Emissions trading scheme (ETS) is a market-oriented measure to promote green transition. In order to determine systemic risk among ETS pilots and industrial supply chain in China, this study applies a financial network approach on a system consisting of 7 emission allowances and 27 commodities. The empirical findings confirm that ETS poses transition risks to industrial supply chain by creating new information channels between emission allowances and commodities. Such channels are generated by the extensive financial connections within the ETS-commodity system. The degree of financial connection dynamically responds to shocks from institutional events of ETS, transaction adjustments for commodities, and extreme risk event like COVID-19. Analysis of connection structure shows that most of the products within the ETS-commodity system differ in the ability to generate financial connections. The bidirectional connection feedbacks between them and their connectors exhibit asymmetry. Several centrality indicators also screen out systemically important products from multiple scales. The findings could have policy implications for related authorities, manufacturers and investors.

Carbon emission trading scheme and firm debt financing

This study examines the impact of firms’ participation in an emissions trading scheme (ETS) on their debt financing. Using a unique quasi-natural experimental setting in China, we find that the cost of debt increases and firm access to debt decreases when firms participate in an ETS, which indicates that lenders interpret firms’ participation in an ETS as a potential risk compared to nonparticipation. Further analyses show that the negative effect of participation in an ETS on firm debt financing is more significant for ETS participants that are less able to pass costs on, that operate in regions with less financial marketization, and that are less innovative. For firms that are covered by the national ETS, the restricted access to debt is alleviated for those with experience in a pilot ETS.

China’s emissions trading scheme, firms’ R&D investment and emissions reduction

As the world’s largest energy consumer and carbon emitter, China accounts for approximately one-third of global carbon dioxide (CO2) emissions. Launched in 2021, China’s national emissions trading scheme (ETS) has become a well-established market-based instrument in the country’s efforts to peak CO2 emissions and achieve carbon neutrality. This study, viewed as a quasi-natural experiment, examines the impact of China’s ETS pilots. We evaluate the carbon emissions reduction effects and associated mechanisms of China’s pilots using a propensity score-matched difference-in-differences model (PSM-DID) and Chinese State Administration of Tax (SAT) data. The findings show that the ETS pilots have led to a 4.3% and 7.5% reduction in the carbon emissions intensity and total carbon emissions of firms, respectively. Firms in the ETS pilot regions reduce carbon emissions and intensity mainly by increasing firms’ willingness and investment in R&D. Further investigation reveals heterogeneity in carbon emissions reduction among firms of different sizes, leverage ratios, and ownership. The findings suggest that in order to fully realize the emissions reduction potential of the ETS pilots, the government should expand the range of entities covered and improve the liquidity of the carbon market.

Study of environmental regulation on industrial energy conservation and emission reduction

ObjectiveChina has become the top emitter of carbon dioxide (CO2), since 2006 and continued to maintain a rapid economic expansion alongside rising energy conservation and emission reduction. China faces a deteriorating environment regulation and increased domestic and international pressure to reduce emissions. MethodsThe Emission Trading Scheme (ETS) must be able to decrease emissions and promote energy conservation in developing countries in order for these countries to experience sustainable economic and environmental growth. The impact of China's carbon dioxide (CO2) ETS pilot law, which took effect in 2011, on energy efficiency and carbon reduction was examined in this article. To examine how the CO2 ETS affects energy efficiency and emission reduction, we employ the difference-in-differences (DID) model based on the panel data of the two-digit sector at the province level. ResultsAccording to the findings, regulated industries in pilot areas use 22.8% less energy and emit 15.5% less CO2 than those in non-pilot areas. These reductions were the outcome of the CO2 ETS. According to additional analysis, boosting energy technical efficiency and modifying the industrial structure are the major factors driving the consequences of policy. ConclusionThe CO2 ETS also functions better, according to our research, in regions with strong environmental regulation and marketization. According to our research, developing countries' attempts to conserve energy and reduce emissions have benefited from the CO2 ETS.

Impact of China's carbon emissions trading scheme on urban air quality: a time-varying DID model.

Using panel data for 277 Chinese cities, this paper applies a time-varying difference-in-differences (DID) model to empirically test the impact of China's carbon emissions trading scheme (ETS) on urban air quality, and further explores its heterogeneity and the mechanisms involved. The results show that ETS can improve urban air quality. This conclusion remains robust through a series of robustness tests, including PSM-DID estimation, varying window periods, exclusion of significant events, lag phase, and placebo tests. The dynamic effect test indicates that ETS has a continuous and effective effect on improving urban air quality. Mechanism analysis reveals that the degree of marketization can enhance the improvement effect that ETS has on urban air quality. Meanwhile, industrial structure upgrading and green technology innovation are important mechanisms by which pilot ETS policy improves urban air quality. Regional heterogeneity analysis finds that ETS only improves urban air quality in eastern and central regions.

Effects of carbon emission trading schemes on green technological innovation by industrial enterprises: Evidence from a quasi-natural experiment in China

To mitigate global climate change and achieve the targets of the Nationally Determined Contributions (NDCs), the Chinese government implemented a carbon emission trading scheme (ETS) pilot policy in batches. However, there has been no unified consensus at present on whether the ETS pilot policy has stimulated green technological innovation. By applying a multi-period propensity score matching and difference-in-differences method, as well as using panel data from 2007–2019 of A-share listed Chinese firms, this study constructed a quasi-natural experiment to examine the causal effects of China's ETS pilot policy on the green technological innovation of the firms. The results were validated after a series of robustness checks and showed that the ETS has significantly encouraged green technological innovation in industrial enterprises. This positive effect is greater for firms with large capital scales, with better corporate governance, especially for those in the mining and manufacturing industry. Further analysis indicated that corporate social responsibility and operating income were the driving factors of the effects on innovation, whereas R&D expenditures have inhibited the effects.

The dual environmental and economic effects of the emission trading scheme under local fiscal pressure: “efficient markets” and “promising governments”

Compared with developed economies, China implements the Emission Trading Scheme (ETS) within a fundamentally distinct political-economic-institutional context. This study aims to investigate the internal mechanisms and external constraints of emission trading scheme in achieving the dual benefits of environmental preservation and economic advancement within the institutional context of fiscal decentralization. We demonstrate that the transmission from emission reduction to economic returns inherently facilitates the realization of dual benefits, and further propose a restrictive effect of local fiscal pressure on the effectiveness of the emission trading scheme. Using panel data of 284 prefectural-level cities from 2003 to 2017, we conduct a quasi-experiment based on China’s emission trading scheme pilot policy in 2007. The results indicate three primary conclusions: First, the implementation of emission trading scheme in China generally yields dual environmental-economic benefits, with emission reduction serving as a transmission channel for realizing economic gains. Second, high fiscal pressure on local governments not only directly undermines policy effects but also indirectly affects the transmission channel. Finally, the dual benefits have been realized in eastern China, but not yet in the central and western regions. This study contributes to the research on market-oriented environmental governance under fiscal decentralization. The theoretical logic of this study can be applied to a wide range of market-based mechanisms for green factors trading, providing valuable insights for countries facing similar challenges.

Impact of economic policy uncertainty on the volatility of China's emission trading scheme pilots

This paper aims to investigate the impact of the economic policy uncertainty (EPU) on the volatility of China's emission trading scheme (ETS) pilots. Based on the GARCH-MIDAS model, we proxy EPU using two domestic EPU indices and two global EPU indices and explore their impacts on the volatility of three representative ETSs, Hubei, Guangdong, and Beijing ETS pilots in China from 2014 to 2020. Our findings are threefold. Firstly, the effects on the volatility differ significantly across the ETS pilots and EPU indices. When the weighted value of the growth rate of EPU increases by 0.01 unit, the long-term volatility of Hubei and Beijing ETSs rises by 9.371%–28.777% and 1.629%–5.444%, respectively. For Guangdong, the volatility increases by 11.926%–22.713% when the domestic EPU rises and decreases by 38.302%–59.063% when the global EPU rises. Secondly, economic policy events affect the volatility of ETS pilots by adjusting industries' production, and such influence is alleviated by stabilization mechanisms of the carbon market. Finally, the GARCH-MIDAS model incorporating EPU indices has superior out-of-sample prediction ability in the Hubei and Beijing ETS. This study provides important policy implications for government to stabilize the volatility of ETS and a reliable method for investors to construct portfolios.

The impact of carbon emission trading on green innovation of China's power industry

As the primary source sector of carbon emissions, the power industry's green innovation is an indispensable component of China's low-carbon transformation. This paper took China's Carbon Emission Trading Scheme as a quasi-natural experience and adopted the synthetic control method to evaluate the impact of Carbon Emission Trading Scheme pilot policy on power industry's green innovation based on the provincial industrial level data. Furthermore, this paper examined the impact mechanisms of Carbon Emission Trading Scheme on the power industry's green innovation through policy comparison, moderating and mediating effect analyses. The research findings show that: 1) there is heterogeneity in Carbon Emission Trading Scheme's effectiveness in inducing green innovation in China, the power industry only in Beijing and Guangdong has been significantly promoted, while other pilots have not; 2) the success of Beijing and Guangdong can be attributed to distinctive features of their carbon market and power industry, including the refined quota accounting mechanism, the application of paid quota allocation, the larger enterprise scale and more research and development investment; 3) enterprise scale and research and development investment have positive moderating effect and mediating effect in the promotional effect of the Carbon Emission Trading Scheme on green innovation respectively. Finally, some policy recommendations are put forward to promote the power industry's green innovation and carbon market construction.

Green Technology Innovation under China’s New Development Concept: The Effects of Policy-Push and Demand-Pull on Renewable Energy Innovation

Green technology innovation meets the dual expectation of innovative development and green development perspectives. Under the canonical demand-pull and policy-push theories, a long-term mechanism for green technology innovation could be formed through upstream policy push and downstream demand-pull. Leveraging China’s regional carbon emission trading scheme pilots as a quasi-natural experiment, this paper examines the policy-push and demand-pull effects on innovation in renewable energy patents. The data pertain to the city-level renewable energy patents from 2000 to 2020. Based upon the triple difference-in-difference method, results suggest that both policy-push and demand-pull factors exert positive effects on innovation. This paper further explores the practical and theoretical implications of green technology innovation under the new development perspective.

Identifying and analyzing the regional heterogeneity in green innovation effect from China’s pilot carbon emissions trading scheme through a quasi-natural experiment

China has initiated a carbon emissions trading scheme (ETS) in some pilot regions to promote green innovation by local industrial firms. Nevertheless, not all pilot ETSs can effectively stimulate local green innovation, considering the differences in regional economic development as well as the design of the ETS. With this in mind, we develop a computerized methodology to empirically identify and analyze the regional heterogeneity in the green innovation effect from the ETS through a quasi-natural experiment. First, we propose a mathematical framework to empirically identify the regional heterogeneous effect of ETS on green innovation based on the synthetic control method. Then we construct a moderating effect model to verify the influencing mechanism of regional external factors on the heterogeneous green innovation effect of the ETS. Finally, we develop a framework for causal inference using a dynamic effect model to estimate the regional heterogeneous green innovation effect from the ETS, which varies over time. We have identified the following regional heterogeneity in the green innovation effect from China’s pilot ETSs: only Hubei and Guangdong ETSs have always effectively promoted local green innovation; Tianjin ETS has a short-term promotion effect before the economic sluggish period, while this positive effect appeared gradually in Shenzhen ETS after several years; however, the pilot ETSs in other regions do not have a positive effect on green innovation with a different evolutionary path. Appropriate industrial coverage and emissions control targets, as well as active trading platforms, have been identified as important external factors that positively moderate the green innovation effect of regional ETSs. Finally, we provide several managerial implications for ETS policymakers and regulators to stimulate green innovation considering regional heterogeneity.

Regional imbalances of market efficiency in China’s pilot emission trading schemes (ETS): A multifractal perspective

China's emission trading schemes (ETS) have caused great concern worldwide. Exploring the regional imbalance of market efficiency in China's pilot ETS is a crucial task. We use empirical mode decomposition (EMD)-based multifractal detrended fluctuation analysis (MFDFA) to analyze market efficiency of China's pilot ETS. The contributions are as follows. First, the multifractal features of China’s pilot ETS have been discovered. Second, China’s pilot ETS are subject to a high risk of price fluctuations and market risk can be arranged from highest to lowest as Shanghai, Tianjin, Shenzhen, Guangdong, Hubei, Beijing, Chongqing, and Fujian. Third, market efficiency can be arranged from highest to lowest as Chongqing, Fujian, Hubei, Guangdong, Shanghai, Shenzhen, Beijing, and Tianjin. Fourth, the sources of multifractal features of China’s pilot ETS were investigated. This paper provides new ideas for studying market efficiency of China's ETS and policy implications for risk prevention.

Carbon mitigation and energy conservation effects of emissions trading policy in China considering regional disparities

As an essential policy instrument for carbon mitigation and energy conservation, the effectiveness of China's pilot emissions trading scheme (ETS) since its implementation in 2011 requires investigation. This study explores whether and to what extent China's pilot ETS has affected carbon dioxide (CO2) emissions per capita and the efficiency of the policy regarding energy consumption per capita, also examining regional disparities. We use the difference-in-differences method to examine 31 Chinese provinces, autonomous regions and municipalities from 2000 to 2015. Three main findings emerge. First, the pilot ETS can effectively reduce local CO2 emissions, with reductions ranging between 15.96% and 18.94%. Second, the policy effect on carbon mitigation is significant and long-lasting, but gradually weakens, while the policy effect on energy consumption is not obvious and usually has a three-year lag. Third, considering regional disparities, the carbon mitigation effect is significant in eastern China but not in central and western China. This disparity is also evident for the energy conservation effect, but with a time lag. A placebo test also confirmed that the results are robust and significant. We propose policy suggestions to improve and prolong the efficiency of carbon mitigation and energy conservation and balance identified regional disparities.