The effect of emission trading policy on carbon emission reduction: Evidence from an integrated study of pilot regions in China

Carbon trading systems are increasingly used by many countries nowadays to reduce carbon emission and improve the quality of environment. To evaluate the effect of emission trading system on carbon emission reduction, this study applies a robust econometric method difference-in-difference estimation on city-level panel data in China from 2004 to 2015. The findings of this study indicate that the emission trading policy adopted in pilot regions has reduced carbon emission by approximately 16.2% and such effect is particularly prominent in eastern areas of China where the economy is more developed. Moreover, other factors such as the development of the second industry and foreign direct investment are also found to affect carbon emission. The results of this study provide evidence for the success of the emission trading system in reducing carbon emission across pilot cities and suggest that an expanded scope of carbon trading mechanism adopted in China would further control the carbon emission. Meanwhile, a multi-level emission trading system from central to local government needs to be built using a variety of market-based instruments to promote the equal development of carbon trading market in various regions with different economic development levels.