Can carbon emission trading improve carbon emission performance? Evidence from a quasi-natural experiment in China

Carbon emission trading policies play a key role in reducing carbon emissions through market-based mechanisms. In the context of China's carbon neutrality goals and carbon peaking targets, it is important to predict and evaluate the effectiveness of such policies. The combined impact of carbon trading policies on carbon emission reduction and economic output has not been well investigated in previous studies. In this study, the impact of carbon emission trading policies on regional carbon emission performance was assessed through mechanism analysis and empirical tests. The mechanism analysis showed that carbon emission intensity reduction relied on three mediating effects: technological innovation incentives, industrial structure optimization, and energy substitution. For the empirical test, the multi-time difference-in-differences (DID) method was adopted to study the impact using panel data from 30 provinces in China between 2005 and 2019. Moreover, the specific impact mechanism was further tested using mediating effects. The results showed that China's carbon trading policy has significantly affected the carbon emission performance of the pilot regions, and factors such as GDP per capita, urbanization level, and capital-labor ratio have notably contributed to the reduction of carbon emission intensity. The proportions of the three mediating effects in the total effect were estimated to be 60.98%, 23.17%, and 10.14%, respectively. This study provides an empirical approach to the study of the impact of carbon trading policy on carbon emission reduction and economic output and can serve as a reference for addressing climate change and alleviating conflicts between the environment and economic growth in similar regions.