Climate policy and carbon leakage: Evidence from the low-carbon city pilot program in China

Abstract

The low-carbon city pilot (LCCP) policy, aimed at promoting the transformation of cities towards low-carbon practices, is an important action for China to mitigate climate change. Though this climate policy brings positive effects in many aspects, the issue of potential carbon leakage due to regional disparity has been overlooked. This paper introduces a novel approach by employing the spatial DID model and prefecture-level city data to assess the LCCP policy and its implications for carbon leakage. The innovative aspect lies in its spatially differentiated analysis, which reveals that while the LCCP policy effectively reduces carbon emissions of local pilot cities, it simultaneously triggers carbon leakage to neighboring non-pilot cities, with the leakage effects diminishing with increasing distance. Additionally, this study uncovers that carbon leakage risks are mitigated when multiple pilot cities are geographically clustered, enhancing the overall effectiveness of the policy. Finally, the impact channel analysis uniquely identifies that carbon leakage results from the inter-city relocation of high-carbon industries, such as manufacturing, which exhibits spatial attenuation and temporal lag effects. This study advances the understanding of low-carbon city pilot programs and provides valuable insights for mitigating carbon leakage risks.