Carbon Abatement and Leakage in China’s Regional Carbon Emission Trading

Abstract

Emission trading schemes (ETS) are increasingly becoming a popular policy instrument to balance carbon abatement and economic growth. As a globally unified carbon pricing system has not yet been established, whether regionally operated ETSs cause carbon leakage remains a major concern. Taking China’s regional pilot ETSs as a quasi-natural experiment, the study uses the spatial difference-in-differences method to examine how regional ETSs affect carbon emissions in and outside cities of policy implementation. Our analysis finds that China’s regional ETS policy contributes to a 6.1% reduction in urban CO<inf>2</inf> emissions and a 6.6% decline in emissions intensity in regulated cities, causing carbon leakages that increase CO<inf>2</inf> emissions in neighboring cities by 1.7% on average. Our finding further suggests that regional ETSs mitigate local CO<inf>2</inf> emissions through outsourcing production, improving energy efficiency and decarbonizing energy structure, whereas the outsourcing of industrial production drives up CO<inf>2</inf> emissions in adjacent cities. Moreover, the performances of regional ETSs vary largely by socioeconomic context and mechanism design. China’s regional ETSs reduce CO<inf>2</inf> emissions more effectively in central and industrial cities but with more severe carbon leakage, while rigorous compliance mechanisms and active market trading help deepen carbon abatement and alleviate carbon leakage.