A research team from Duke Kunshan University published an article in Proceedings of the National Academy of Sciences of the United States (PNAS), a leading international scientific journal, which concludes that pilot projects of China’s regional emissions trading system (ETS) are effective in reducing pollution. Using China’s regional ETS pilots as a near-natural experiment, the researchers provided a comprehensive assessment of their effect on carbon emissions and business economic performance. Lessons learned from the regional pilot projects have provided important insight into the design of China’s national carbon emissions trading system.
This is the first research report on China’s regional carbon market drivers that focuses on the manufacturing and energy sectors. The research team included Jingbo Cui, Associate Professor of Applied Economics in the Division of Social Sciences and Environmental Research Center of DKU, Chunhua Wang, Assistant Professor, Antai College of Economics and Management, Shanghai Jiaotong University, Junjie Zhang, founding director of the Environmental Research Center and Masters Program in Environmental Policy (iMEP) at DKU and Yang Zheng, PhD student at the London School of Economics and Political Science.
Assessing the emission reduction effects of China’s regional ETS pilots from 2013 to 2015 based on firm-level data, the research team found that regional ETS pilots were effective in reducing emissions from company, resulting in a 16.7% reduction in total emissions and a 9.7% reduction in emissions intensity.
In 2011, the National Development and Reform Commission (NDRC) issued the Notice on the Piloting Work of Carbon Emission Trading and approved seven pilot carbon trading schemes, enabling pilot companies that produce emissions below their cap to sell their excess allowances to other companies. Regional ETS pilots during the ten-year trial covered energy-intensive industries including electricity, petrochemicals and cement. In 2019, company emissions in the power, petrochemical and steel sectors under the Shanghai Carbon Emissions Quota Mechanism decreased by 8.7%, 12.6% and 14%, showing that the regional ETS pilot projects have played a positive role in reducing carbon emissions.
In 2020, China further proposed to have carbon dioxide emissions peak before 2030 and achieve carbon neutrality before 2060. In July 2021, China decided to launch national online carbon trading for the power generation industry at a State Council executive meeting.
Cui believes the research results provide much-needed insight into the design of China’s national carbon market. “The regional ETS pilots are a very important policy step in achieving China’s ’30-60′ targets (new peak and neutrality targets),” Cui said. “As the first research covering the manufacturing and energy sectors, our study helps policy makers with the challenges that might be encountered when scaling a future national carbon market, and provides evidence and guidance to the enterprise level. »
The pilot ETS provided an excellent setting as a near-natural experience. The paper used a matched difference-in-differences (DID) approach to identify plausible causal effects of ETS on carbon emissions and business economic outcomes. The estimation of the ETS effects took place in two stages. The team first constructed a comparison group by one-to-one matching. This approach matched each regulated company with an unregulated company in the same industry based on certain observable attributes. The researchers performed a balancing test to ensure that the unregulated firm could serve as a counterfactual for the regulated firm. With the matched sample, the team then used the DID approach to estimate the effects of the ETS on carbon emissions. The researchers demonstrated unequivocally that China’s ETS leads to reduced carbon emissions and provided confidence for the deployment of a national ETS.
Zhang also expressed confidence in the future of China’s carbon market. “China faces the twin challenges of economic growth and reducing carbon emissions, and its climate policy must strike a delicate balance between these two goals,” he said. “As a market-based policy instrument, the emissions trading system makes it possible to achieve emission reduction targets with minimal social costs, while incentivizing companies to engage in innovation and low-carbon transformation. We find that regional ETS pilots lead to reduced carbon emissions despite low carbon prices and infrequent trading, while causing no significant negative impact on companies’ financial performance. This empirical evidence provides useful references for the design of a national ETS market.”
According to the United Nations Environment Programme, China’s emissions in 2018 reached 13.7 gigatonnes of carbon dioxide equivalent, more than a quarter of global emissions. As the biggest emitter of carbon dioxide, China’s efforts to meet its commitment under the Paris Agreement have a crucial impact on global climate action. The data also shows that China’s emissions growth is slowing, with an increase of 1.6% in 2018.
Carbon markets not only help companies reduce their emissions, but also incentivize them to explore low-carbon technological innovations and increase their productivity. Studies have shown a 29.1% increase in business productivity as a result of ETS policies, indicating no direct association between emissions reductions and lower productivity.
“As a result, enterprises in the ETS pilot regions adjusted their labor and capital. However, their productivity improved significantly, which promoted sustainable development,” Cui said. – intensive industries.
Cui, Zhang and their team have long focused on China’s progress towards peak emissions and carbon neutrality. They will continue researching related policies and low-carbon technology innovation, providing new perspectives and ideas on global climate change issues based on China’s experience.