When carbon emission trading meets a regulated industry: Evidence from the electricity sector of China

This paper provides retrospective firm-level evidence on the effectiveness of China’s carbon market pilots in reducing emissions in the electricity sector. We show that the carbon emission trading system (ETS) has no effect on changing coal efficiency of regulated coal-fired power plants. Although we find a significant reduction in coal consumption associated with ETS participation, this reduction was achieved by reducing electricity production. The output contraction in the treated plants is not due to their optimizing behavior but is likely driven by government decisions, because the impacts of emission permits on marginal costs are small relative to the controlled electricity prices and the reduction is associated with financial losses. In addition, we find no evidence of carbon leakage to other provinces, but a significant increase in the production of non-coal-fired power plants in the ETS regions.