The green paradox of time dimension: From pilot to national carbon emission trading system in China

Abstract

The Emission Trading System (ETS) is essential for China to achieve its emission reduction goals. This paper combines Synthetic Difference-in-Differences (SDID) and Difference-in-Differences (DID) methods, which are more suitable for the Chinese scenario, to assess the comprehensive influence of the China's ETS. The performances of pilot and non-pilot regions confirm the existence of the “green paradox” issue in China's ETS construction. SDID experiments demonstrate that pilot ETSs significantly suppress emissions in pilot regions. However, most emission reduction occurs during the policy announcement period rather than implementation, indicating an emission period-spillover effect. DID estimations illustrate that the national ETS stimulates the emissions in non-pilot regions during the declaration period. The results of China's ETS policies highlighting the emergency to address the policy time lag problem. Further mechanism tests reveal that most effects are driven by changes in energy structure and carbon leakage. Additionally, we conduct heterogeneity tests from over market design and regional attributes. The results show that higher market coverage and stricter penalties in the ETS market can partially alleviate the “green paradox”. Similarly, reducing regional carbon concentration, promoting marketization, and increasing economic openness also have mitigating effects. Based on the obtained results, this paper concludes with policy recommendations.