The long term effects of carbon trading markets in China: Evidence from energy intensive industries

Carbon trading scheme is an instrument adopted in many countries of the world to reduce CO2 emissions. As an important way of environmental regulation, whether it can reduce the emissions and promote the economic development at the same time needs further investigation. This paper tests whether the Porter Hypothesis is true in China's carbon emissions trading scheme for energy intensive industries. Using provincial-level, industrial-level and firm-level data, we construct a DEA model that can incorporate the emissions trading behavior among different decision making units to show that the carbon emissions trading scheme can only reduce the CO2 emissions but cannot increase the output significantly. That is, the carbon intensity is decreased. The reason is that the carbon trading scheme is conducive to the improvement of the production efficiency, and firm-level research and development input increases after carbon trading scheme. These findings are robust to several robustness checks. Our paper demonstrates the effectiveness of the carbon emissions trading scheme in reducing emissions. An external technological breakthrough is needed if the win-win situation of reducing CO2 emissions and promoting economic development simultaneously is wanted to be achieved.