The effectiveness of China’s regional carbon market pilots in reducing firm emissions

Significance The emission trading system (ETS) is an important policy instrument for China to achieve its climate targets. However, the effectiveness of ETS in emission reductions and its economic consequences are unknown. Using a unique dataset of firm tax records, we comprehensively assess the impacts of China’s regional ETS pilots, taking advantage of the policy experiments in certain sectors across seven jurisdictions. We demonstrate unambiguous evidence that China’s ETS leads to a reduction in carbon emissions despite low carbon prices and infrequent trading. We also identify the channels through which firms respond to ETS by adjusting energy consumption and sources, employment, capital, and productivity. The lessons learned from the regional pilots shed light on the design of China’s national carbon ETS.