Can carbon emission trading scheme achieve energy conservation and emission reduction? Evidence from the industrial sector in China

Abstract Whether the emission trading scheme (ETS) can achieve energy conservation and emission reduction in developing countries is crucial for these countries to achieve sustainable economic and environmental development. This study investigates the energy conservation and emission reduction effects of China's carbon dioxide (CO2) ETS pilot policy implemented in 2011. Based on panel data of the two-digit industry at province level from 2005 to 2015, we adopt the difference-in-differences (DID) model to examine the effects of the CO2 ETS on energy conservation and emission reduction. The results show that the CO2 ETS decreases the energy consumption of the regulated industries in pilot areas by 22.8% and the CO2 emissions by 15.5% compared to those in nonpilot areas. Further analysis indicates that the policy effects are mainly driven by improving technical efficiency and adjusting industrial structure. In addition, we find that the CO2 ETS performs better in areas with high levels of environmental enforcement and marketization. Overall, our findings suggest that the CO2 ETS has achieved energy conservation and emission reduction effects in developing countries.