Emissions abatement under a rate-based emissions trading system: facility-level evidence from China

As the world’s largest emissions trading system (ETS) by covered emissions, China’s national ETS uses an unconventional rate-based design to allocate allowances, which inherently creates “winners” (surplus units) and “losers” (deficit units). Utilizing a unique facility-level dataset and a continuous difference-in-differences framework, we show that the national ETS reduces CO 2 emissions from regulated power units by 2.3 %. Crucially, this abatement is mainly driven by reallocating output from deficit to surplus units instead of within-unit efficiency gains or fuel switching. Moreover, such output substitution is more pronounced among units within the same regional grids or parent companies. This policy also delivers substantial co-benefits by reducing air pollution from regulated plants. Our findings contribute ex- post evidence on the effectiveness of rate-based ETSs and offer insights for policymakers seeking to mitigate emissions on a broad scale while maintaining production levels.