Carbon price distortion and energy resource misallocation: evidence from China’s emissions trading scheme

The Coase Theorem suggests that carbon markets should primarily perform two functions: price discovery and resource allocation. However, carbon price distortions may weaken both functions, raising concerns over resource misallocation and a possible “distortion superposition” effect. This study constructs a generalized cost function incorporating factor price distortions and carbon emission constraints to measure the degree of carbon price distortion. Using panel data for 30 Chinese provinces from 2000 to 2022 and a difference-in-differences approach, we examine how carbon price distortion affects energy resource misallocation in emissions trading scheme (ETS) pilot regions. The results show that energy misallocation is widespread across provinces and exhibits substantial regional heterogeneity. More importantly, the implementation of the ETS significantly aggravates energy misallocation in pilot areas, indicating that the policy, at its current stage, has not effectively directed energy resources toward high-efficiency and low-carbon sectors. Carbon price distortion further amplifies this adverse effect: the larger the deviation of carbon prices from their reasonable level, the stronger the ETS-induced deterioration in energy allocation. Mechanism analysis shows that carbon price distortion exacerbates energy misallocation mainly by constraining energy input and inhibiting green innovation. These findings provide empirical support for improving allowance allocation, refining carbon price formation, thereby contributing to the optimization of energy resource allocation and the achievement of China’s “dual-carbon” goals.