An empirical analysis on emissions reduction effect and main reduction drivers of China's carbon emissions trading pilot

Empirical evidence substantiates the utilization of market-oriented trading mechanisms as a significant strategic tool for many counties to effectively regulate greenhouse gas (GHG) emissions. This research endeavors to comprehensively evaluate the impact of carbon emission trading scheme on the reduction of carbon emissions in China. To this end, we analyze provincial panel data from China for the period from 2005 to 2019. Our empirical analyses explore the policy effects by employing two-way Fixed Effects model and Propensity Score Matching Difference-in-Differences model. Importantly, we shed a new light on the role of energy intensity on this relationship. The panel analyses find a notable reduction of 27.2% in total carbon emissions in provinces where Emission Trading Pilot has been implemented. Furthermore, we attempt to better understand the underlying mechanism how GHG emissions reduction is achieved, by elucidating the mediating effects of energy intensity in reducing carbon emissions. Our analysis reveals a substantial role of energy efficiency enhancement in reducing carbon emissions: when controlling for the energy intensity level, the policy effect of Emission Trading Pilot shrinks to 9.1%. It implies that 18.1% out of total 27.2% reduction effects are largely attributable to the enhancement of energy intensity. Our findings highlight the importance of efficient use of energy in reducing carbon emissions in a growing economy as well as in enabling sustainable growth.