Carbon Pricing Induces Innovation: Evidence from China's Regional Carbon Market Pilots

Cui, Jingbo; Zhang, Junjie; Zheng, Yang

doi:10.1257/pandp.20181027

Cited by 126 publications

(66 citation statements)

References 4 publications

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“…We find that ETS stimulates firms to improve productivity. This finding is consistent with the literature documenting how ETS has sparked low-carbon innovation in the European Union (39,40) and in China's regional ETS pilot areas (25)(26)(27). Productivity growth reduces the cost of compliance with carbon regulations, which alleviates the concern of policymakers regarding the tradeoff between climate mitigation and economic growth.…”

Section: Discussionsupporting

confidence: 88%

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The effectiveness of China’s regional carbon market pilots in reducing firm emissions

Cui

Wang

Zhang

et al. 2021

Proc. Natl. Acad. Sci. U.S.A.

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125

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China has implemented an emission trading system (ETS) to reduce its ever-increasing greenhouse gas emissions while maintaining rapid economic growth. With low carbon prices and infrequent allowance trading, whether China’s ETS is an effective approach for climate mitigation has entered the center of the policy and research debate. Utilizing China’s regional ETS pilots as a quasi-natural experiment, we provide a comprehensive assessment of the effects of ETS on firm carbon emissions and economic outcomes by means of a matched difference-in-differences (DID) approach. The empirical analysis is based on a unique panel dataset of firm tax records in the manufacturing and public utility sectors during 2009 to 2015. We show unambiguous evidence that the regional ETS pilots are effective in reducing firm emissions, leading to a 16.7% reduction in total emissions and a 9.7% reduction in emission intensity. Regulated firms achieve emission abatement through conserving energy consumption and switching to low-carbon fuels. The economic consequences of the ETS are mixed. On one hand, the ETS has a negative impact on employment and capital input; on the other hand, the ETS incentivizes regulated firms to improve productivity. In the aggregate, the ETS does not exhibit statistically significant effects on output and export. We also find that the ETS displays notable heterogeneity across pilots. Mass-based allowance allocation rules, higher carbon prices, and active allowance trading contribute to more pronounced effects in emission abatement.

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Section: Discussionsupporting

confidence: 88%

“…Some literature on the effectiveness of China's ETS has also started to emerge. However, these studies are only focused on certain companies, such as power generators (24), large firms (25), or publicly listed companies (26,27). The overall impacts of China's ETS on firms are still largely unknown.…”

mentioning

confidence: 99%

The effectiveness of China’s regional carbon market pilots in reducing firm emissions

Cui

Wang

Zhang

et al. 2021

Proc. Natl. Acad. Sci. U.S.A.

Self Cite

125

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“…Our findings show significant induced innovation effects of the ETS both directly on ETS firms and indirectly on large non-ETS firms on top of other climate policy influences. The identified effects help to sort out previously inconsistent research findings related to but not directly from emissions trading in China: policy announcement in 2011 of ETS pilots has a positive effect on innovation from a small set of publicly listed firms possibly but not necessarily subject to emissions trading 23 ; the aggregate effect at the regional level was arguably negative 24 ; energy price, as a proxy for carbon price, has a positive effect on clean innovation but a negative one on other innovation 25 . By using the same estimation method, our results are directly comparable to the innovation effect of the EU ETS 22 , showing a similar, significant effect on individual ETS firms but limited impacts at the regional level.…”

Section: Introductionmentioning

confidence: 98%

Low-carbon innovation induced by emissions trading in China

et al. 2019

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Emissions trading scheme (ETS) has been adopted by an increasing number of countries and regions for carbon mitigation, but its actual effect depends on specific program design and institutional context. Before launching the world largest ETS, China experimented with seven independent regional pilots, whose effects are only indirectly explored. Here we provide firm-level evidence of the innovation effect directly from China’s pilot emissions trading, based on latest patenting information and a quasi-experimental design. China’s pilots increase low-carbon innovation of ETS firms by 5–10% without crowding out their other technology innovation. The increase from ETS firms accounts for about 1% increase of the regional low-carbon patents, while a similar increase from large non-ETS firms is also induced by the ETS. Most importantly, the effect is not associated with permit price, auction, or firm characteristics, but is driven by mass-based allowance allocation. A rate-based approach, however, is adopted by China’s national market.

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“…Less than 40 years later, it has become a global standard in environmental governance (Newell and Rogers 2003;Voß 2007). Emissions trading schemes stimulate innovation in addition to reducing emissions (Calel and Dechezleprêtre 2016;Calel 2018;Cui et al 2018). Rights-based transferable permits are the basis for managing pollutants and reigning in over-fishing, and also represent the foundation for payments for ecosystem services (Sterner and Robinson 2018).…”

Section: Introductionmentioning

confidence: 99%

For want of a chair: Teaching price formation using a cap and trade game

Carattini

Fenichel

Gordan

et al. 2019

The Journal of Economic Education

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The tradable or transferable permit system, "cap and trade", is one of the most innovative policy options developed by environmental economists. Over the last 40 years, cap and trade programs have been used around the globe by some of the world's biggest economies. By placing a cap on a bad, whether a pollutant or excess fish mortality, and then allowing firms to buy and sell the right to generate it, policy makers combine government intervention with market-based incentives in order to improve welfare and internalize the externality. Such programs represent a great opportunity for economics instructors to show students how economic theory can be used in the real world by policy makers while teaching foundational economic concepts. By using an in-class game that utilizes a mobile app or paper-based interaction to create a market for a pollutant (or another rival but non-excludable resource), students can learn several important tenants of economics. These include how prices are formed and how price-based incentives lead to voluntary, as if cooperative, behavior by agents. This active learning method engages students while improving their comprehension of price formation, gains from trade, voluntary response to incentives, and an important environmental economics policy.

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Carbon Pricing Induces Innovation: Evidence from China's Regional Carbon Market Pilots

Cited by 126 publications

References 4 publications

The effectiveness of China’s regional carbon market pilots in reducing firm emissions

The effectiveness of China’s regional carbon market pilots in reducing firm emissions

Low-carbon innovation induced by emissions trading in China

For want of a chair: Teaching price formation using a cap and trade game

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