Carbon mitigation effect of emission trading product: Perspective from intra-industry carbon leakage

Abstract

Carbon mitigation within key industries has become a paramount concern in China, yet research focusing on industry-level emissions remains limited despite comprehensive validation of the efficacy of emission trading schemes (ETS) at both enterprise and regional levels. This paper addresses this gap by examining the intra-industry carbon leakage. Firstly, applying multi-period DID method to the industry-level data from 2000 to 2018 in Guangdong province, we empirically find a counterintuitive increase in carbon emissions in the compliance industries despite mitigation efforts by compliance enterprises in the same industries. Secondly, we build a Stackelberg quantity leadership model incorporating ETS and theoretically find that, the intra-industry carbon leakage results in this increased industry-level emissions, notably through the cost crowding-in mechanism. Further theoretical analysis underscores the pivotal role of enhancing ETS coverage ratios for enterprises within compliance industries and bolstering the carbon price mechanism's capacity to accurately reflect enterprises' demand for carbon allowances. Such enhancements are anticipated to effectively mitigate intra-industry carbon leakage and facilitate reductions in industry-level carbon emissions.