When and Under What Conditions Does an Emission Trading Scheme Become Cost Effective?

Abstract

This paper studies when and under what conditions the actions undertaken by the power plants involved in China’s emission trading scheme (ETS) pilot became cost effective. Based on unique plant-level panel data and the difference-in-differences strategy, we identify that an insignificant initial reduction in cost efficiency occurred at the announcement stage for power plants in the pilot provinces; however, the cost efficiency of the pilot plants increased significantly following formal policy implementation. Additionally, the by-stage treatment effects differed across the pilot provinces due to localized market and non-market variations. Localized conditions of higher marketization, stricter policy enforcement, and lower carbon dependence enhanced this positive effect. The synthetic control results confirmed this variation in the policy effects. The carbon trading pilots resulted in improved efficiency in power plants in Shanghai, Guangdong, and Tianjin during the period 2013–2017, with an associated total cost saving of approximately 29.75 million RMB. To enhance the efficacy of the ETS policy, our findings suggest that the design of the policy should consider localized external factors.

Keywords

Carbon trading ETS Cost efficiency Thermal power plant China

Get full access to this article

View all access options for this article.

References

Abadie

Gardeazabal

(2003). “The economic costs of conflict: A case study of the Basque Country.” American Economic Review 93(1): 113–132. https://doi.org/10.1257/000282803321455188.

Abadie

Diamond

Hainmueller

. (2010). “Synthetic control methods for comparative case studies: Estimating the effect of California’s tobacco control program.”Journal of the American statistical Association 105(490): 493–505. https://doi.org/10.1198/jasa.2009.ap08746.

Abrell

Rausch

. (2017). “Combining price and quantity controls under partitioned environmental regulation.”Journal of Public Economics 145: 226–242. https://doi.org/10.1016/j.jpubeco.2016.11.018.

Aigner

Lovell

C.K.

Schmidt

(1977). “Formulation and estimation of stochastic frontier production function models.”Journal of Econometrics 6(1): 21–37. https://doi.org/10.1016/0304-4076(77)90052-5.

Alsaleh

Abdul-Rahim

A.S

. (2018). “Determinants of cost efficiency of bioenergy industry: Evidence from EU28 countries.”Renewable Energy 127: 746–762. https://doi.org/10.1016/j.renene.2018.04.085.

Arthur

W.B.

(1989). “Competing technologies, increasing returns, and lock-in by historical events.”The Economic Journal 99(394): 116–131. https://doi.org/10.2307/2234208.

Ashenfelter

Card

(1985). “Using the longitudinal structure of earnings to estimate the effect of training programs.”The Review of Economics and Statistics 67(4): 648–660. https://doi.org/10.2307/1924810.

Bayer

Aklin

(2020). “The European Union emissions trading system reduced CO2 emissions despite low prices.”Proceedings of the National Academy of Sciences 117(16): 8804–8812. https://doi.org/10.1073/pnas.1918128117.

Blackburn

C.J.

Flowers

M.E.

Matisoff

D.C.

Moreno-Cruz

(2020). “Do pilot and demonstration projects work? Evidence from a green building program.”Journal of Policy Analysis and Management 39(4): 1100–1132. https://doi.org/10.1002/pam.22218.

10.

Blundell

(2020). “When threats become credible: A natural experiment of environmental enforcement from Florida.”Journal of Environmental Economics and Management 101: 102288. https://doi.org/10.1016/j.jeem.2019.102288.

11.

Calel

Dechezleprêtre

(2016). “Environmental policy and directed technological change: evidence from the European carbon market.”Review of Economics and Statistics 98(1): 173–191. https://doi.org/10.1162/REST_a_00470.

12.

Cao

Tang

Cai

Zhang

Xin

Chen

Fang

(2021). “Was it better or worse? Simulating the environmental and health impacts of emissions trading scheme in Hubei province, China.”Energy 217: 119427. https://doi.org/10.1016/j.energy.2020.119427.

13.

Chen

Song

Wang

(2021). “Carbon emissions trading scheme, energy efficiency and rebound effect–Evidence from China’s provincial data.”Energy Policy 157: 112507. https://doi.org/10.1016/j.enpol.2021.112507.

14.

Cui

Wang

Zhang

Zheng

(2021). “The effectiveness of China’s regional carbon market pilots in reducing firm emissions.”Proceedings of the National Academy of Sciences 118(52). https://doi.org/10.1073/pnas.2109912118.

15.

Cui

Fan

Choi

(2020). “Regional competitiveness for attracting and retaining foreign direct investment: a configurational analysis of Chinese provinces.”Regional Studies 54(5): 692–703. https://doi.org/10.1080/00343404.2019.1636023.

16.

Duan

Zhou

Jiang

Bertram

Harmsen

Kriegler

Vuuren

D.P.

Wang

Fujimori

Tavoni

Ming

Keramida

Edmonds

(2021). “Assessing China’s efforts to pursue the 1.5°C warming limit.”Science 372(6540): 378–385. https://doi.org/10.1126/science.aba8767.

17.

Erickson

Kartha

Lazarus

Tempest

(2015). “Assessing carbon lock-in.”Environmental Research Letters 10(8): 084023. https://doi.org/10.1088/1748-9326/10/8/084023.

18.

Filippini

Greene

(2016). “Persistent and transient productive inefficiency: A maximum simulated likelihood approach.”Journal of Productivity Analysis 45(2): 187–196. https://doi.org/10.1007/s11123-015-0446-y.

19.

Filippini

Zhang

. (2016). “Estimation of the energy efficiency in Chinese provinces.”Energy Efficiency 9(6): 1315– 1328. https://doi.org/10.1007/s12053-016-9425-z.

20.

Francesch-Huidobro

C.W.H.

Tang

S.Y.

(2012). “The local environmental regulatory regime in China: Changes in pro-environment orientation, institutional capacity, and external political support in Guangzhou.”Environment and Planning A 44(10): 2493–2511. https://doi.org/10.1068/a44504.

21.

Freyaldenhoven

Hansen

Shapiro

J.M.

(2019). “Pre-event trends in the panel event-study design.”American Economic Review 109(9): 3307–38. https://doi.org/10.1257/aer.20180609.

22.

Fuest

Peichl

Siegloch

(2018). “Do higher corporate taxes reduce wages? Micro evidence from Germany.”American Economic Review 108(2): 393–418. https://doi.org/10.1257/aer.20130570.

23.

Galiani

Quistorff

(2017). “The synth_runner package: Utilities to automate synthetic control estimation using synth.”The Stata Journal 17(4): 834–849. https://doi.org/10.1177/1536867X1801700404.

24.

Gallagher

K.S.

Zhang

Orvis

Rissman

Liu

(2019). “Assessing the Policy gaps for achieving China’s climate targets in the Paris Agreement.”Nature Communications 10(1): 1–10. https://doi.org/10.1038/s41467-019-09159-0.

25.

Gao

G.Y.

Murray

J.Y.

Kotabe

(2010). “A “strategy tripod” perspective on export behaviors: Evidence from domestic and foreign firms based in an emerging economy.”Journal of International Business Studies 41(3): 377–396. https://doi.org/10.1057/jibs.2009.27.

26.

Gao

Xue

Liu

(2020). “Evaluation of effectiveness of China’s carbon emissions trading scheme in carbon mitigation.”Energy Economics 90: 104872. https://doi.org/10.1016/j.eneco.2020.104872.

27.

Haggerty

J.H.

Haggerty

M.N.

Roemer

Rose

. (2018). “Planning for the local impacts of coal facility closure: Emerging strategies in the US West.”Resources Policy 57: 69–80. https://doi.org/10.1016/j.resourpol.2018.01.010.

28.

Pan

Tanaka

(2020). “The short-term impacts of COVID-19 lockdown on urban air pollution in China.”Nature Sustainability 3(12): 1005–1011. https://doi.org/10.1038/s41893-020-0581-y.

29.

Healy

Serafeim

Srinivasan

(2014). “Market competition, earnings management, and persistence in accounting profitability around the world.”Review of Accounting Studies 19(4): 1281–1308. https://doi.org/10.1007/s11142-014-9277-8.

30.

Heyes

Kapur

. (2009). “Enforcement missions: Targets vs budgets.”Journal of Environmental Economics and Management 58(2): 129–140. https://doi.org/10.1016/j.jeem.2009.04.005.

31.

Hintermayer

(2020). “A carbon price floor in the reformed EU ETS: Design matters!” Energy Policy 147: 111905. https://doi.org/10.1016/j.enpol.2020.111905.

32.

Pan

Huang

(2020). “Quantity or quality? The impacts of environmental regulation on firms’ innovation– Quasi-natural experiment based on China’s carbon emissions trading pilot.”Technological Forecasting and Social Change 158: 120122. https://doi.org/10.1016/j.techfore.2020.120122.

33.

Ren

Wang

Chen

(2020). “Can carbon emission trading scheme achieve energy conservation and emission reduction? Evidence from the industrial sector in China.”Energy Economics 85: 104590. https://doi.org/10.1016/j.eneco.2019.104590.

34.

Huang

(2020). “Toward green development? Impact of the carbon emissions trading system on local governments’ land supply in energy-intensive industries in China.”Science of the Total Environment 738: 139769. https://doi.org/10.1016/j.scitotenv.2020.139769.

35.

Janipour

de Nooij

Scholten

Huijbregts

M.A.

de Coninck

(2020). “What are sources of carbon lock-in in energy-intensive industry? A case study into Dutch chemicals production.”Energy Research & Social Science 60: 101320. https://doi.org/10.1016/j.erss.2019.101320.

36.

Joltreau

Sommerfeld

(2019). “Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature.”Climate Policy 19(4): 453–471. https://doi.org/10.1080/14693062.2018.1502145.

37.

Krysiak

F.C.

(2008). “Prices vs. Quantities: The effects on technology choice.”Journal of Public Economics 92(5–6): 1275–1287. https://doi.org/10.1016/j.jpubeco.2007.11.003.

38.

Ladino

J.F.

Saavedra

Wiesner

(2021). “One step ahead of the law: The net effect of anticipation and implementation of Colombia’s illegal crops substitution program.”Journal of Public Economics 202: 104498. https://doi.org/10.1016/j.jpubeco.2021.104498.

39.

Liu

Wang

(2022). “Do carbon ETS pilots improve cities’ green total factor productivity? Evidence from a quasi-natural experiment in China.”Energy Economics 108: 105931. https://doi.org/10.1016/j.eneco.2022.105931.

40.

Liu

J.Y.

Zhang

Y.J.

(2021). “Has carbon emissions trading system promoted non-fossil energy development in China?”Applied Energy 302: 117613. https://doi.org/10.1016/j.apenergy.2021.117613.

41.

Liu

Zhang

Yao

Yuan

. (2017). “Carbon emissions performance regulation for China’s top generation groups by 2020: Too challenging to realize?” Resources, Conservation and Recycling 122: 326–334. https://doi.org/10.1016/j.resconrec.2017.03.008.

42.

Liu

Tian

Xie

Zhen

Sun

(2021). “Option to survive or surrender: carbon asset management and optimization in thermal power enterprises from China.”Journal of Cleaner Production 314: 128006. https://doi.org/10.1016/j.jclepro.2021.128006.

43.

Martin

Sunley

(2006). “Path dependence and regional economic evolution.”Journal of Economic Geography 6(4): 395–437. https://doi.org/10.1093/jeg/lbl012.

44.

McLinden

C.A.

Fioletov

Shephard

M.W.

Krotkov

Martin

R. V.

Moran

M.D.

Joiner

(2016). “Space-based detection of missing sulfur dioxide sources of global air pollution.”Nature Geoscience 9(7): 496–500. https://doi.org/10.1038/ngeo2724

45.

Narassimhan

Gallagher

K.S.

Koester

Alejo

J.R.

(2018). “Carbon pricing in practice: A review of existing emissions trading systems.”Climate Policy 18(8): 967–991. https://doi.org/10.1080/14693062.2018.1467827.

46.

Narita

Requate

(2021). “Price vs. quantity regulation of volatile energy supply and market entry of RES-E operators.”Energy Economics 101: 105425. https://doi.org/10.1016/j.eneco.2021.105425.

47.

Newbery

D.M.

Reiner

D.M.

Ritz

R.A.

(2019). “The political economy of a carbon price floor for power generation.”The Energy Journal 40(1). https://doi.org/10.5547/01956574.40.1.dnew.

48.

Peikes

D.N.

Moreno

Orzol

S.M.

(2008). “Propensity score matching: A note of caution for evaluators of social programs.”The American Statistician 62(3): 222–231. https://doi.org/10.1198/000313008X332016.

49.

Peng

Cui

. (2021). “The environmental and economic effects of the carbon emissions trading scheme in China: The role of alternative allowance allocation.”Sustainable Production and Consumption 28: 105–115. https://doi.org/10.1016/j.spc.2021.03.031.

50.

Pietzcker

R.C.

Osorio

Rodrigues

(2021). “Tightening EU ETS targets in line with the European Green Deal: Impacts on the decarbonization of the EU power sector.”Applied Energy 293: 116914. https://doi.org/10.1016/j.apenergy.2021.116914.

51.

Pizer

W.A.

(2002). “Combining price and quantity controls to mitigate global climate change.”Journal of Public Economics, 85(3): 409–434. https://doi.org/10.1016/S0047-2727(01)00118-9.

52.

Porter

M.E.

(1991). “America’s green strategy.”Scientific American 264(4): 168. https://dx-doi-org.web.bisu.edu.cn/10.1038/scientificamerican0491-168.

53.

Ren

Liu

Wang

Chen

(2020). “Does emissions trading affect labor demand? Evidence from the mining and manufacturing industries in China.”Journal of Environmental Management 254: 109789. https://doi.org/10.1016/j.jenvman.2019.109789.

54.

Schoemaker

P.J.

(1993). “Strategic decisions in organizations: Rational and behavioural views.”Journal of Management Studies 30(1): 107–129. https://doi.org/10.1111/j.1467-6486.1993.tb00297.x.

55.

Sun

Wang

Yin

Zhang

(2019). “Money talks: The environmental impact of China’s Green Credit Policy.”Journal of Policy Analysis and Management 38(3): 653–680. https://doi.org/10.1002/pam.22137.

56.

Teixidó

Verde

S.F.

Nicolli

. (2019). “The impact of the EU Emissions Trading System on low-carbon technological change: The empirical evidence.”Ecological Economics 164: 106347. https://doi.org/10.1016/j.ecolecon.2019.06.002.

57.

Tyler

Cloete

(2015). “Combining price and quantity instruments: Insights from South Africa.”Climate Policy 15(3): 374–387. https://doi.org/10.1080/14693062.2014.937382.

58.

Tzimas

Georgakaki

. (2010). “A long-term view of fossil-fuelled power generation in Europe.”Energy Policy 38(8): 4252–4264. https://doi.org/10.1016/j.enpol.2010.03.055.

59.

Wang

Lin

C. K.

Wang

Liu

Song

(2021). “Location-specific co-benefits of carbon emissions reduction from coal-fired power plants in China.”Nature Communications 12(1): 1–11. https://doi.org/10.1038/s41467-021-27252-1.

60.

Wang

X.L.

Fan

L.P.

(2019). China’s Provincial Market Index Report 2018. China: Social Sciences Academic Press. (in Chinese).

61.

Wang

Zhu

Fan

. (2018). “Transaction costs, market structure and efficient coverage of emissions trading scheme: A microlevel study from the pilots in China.”Applied Energy 220: 657–671. https://doi.org/10.1016/j.apenergy.2018.03.080.

62.

Weitzman

M.L.

(1974). “Prices vs. quantities.”The Review of Economic Studies 41(4): 477–491. https://doi.org/10.2307/2296698.

63.

(2002). “China’s changing urban governance in the transition towards a more market-oriented economy.”Urban Studies 39(7): 1071–1093. https://doi.org/10.1080/00420980220135491.

64.

Gong

(2021). “Can national carbon emission trading policy effectively recover GDP losses? A new linear programming-based three-step estimation approach.”Journal of Cleaner Production 287: 125052. https://doi.org/10.1016/j.jclepro.2020.125052.

65.

Xiao

Zhu

Xie

Huang

(2021). “Evaluating the impact of carbon emissions trading scheme on Chinese firms’ total factor productivity.”Journal of Cleaner Production 306: 127104. https://doi.org/10.1016/j.jclepro.2021.127104.

66.

Xie

(2017). “Firm age, marketization, and entry mode choices of emerging economy firms: Evidence from listed firms in China.”Journal of World Business 52(3): 372–385. https://doi.org/10.1016/j.jwb.2017.01.001.

67.

Xuan

Shang

(2020). “Can China’s policy of carbon emission trading promote carbon emission reduction?”Journal of Cleaner Production 270: 122383. https://doi.org/10.1016/j.jclepro.2020.122383.

68.

Yang

Gan

Liang

Liao

(2021). “Can policies aimed at reducing carbon dioxide emissions help mitigate haze pollution? An empirical analysis of the emissions trading system.”Environment, Development and Sustainability 24(2): 1959–1980. https://doi.org/10.1007/s10668-021-01515-9.

69.

Yang

Yuan

Zhang

(2022). “Carbon Emission Trading Scheme, Carbon Emissions Reduction and Spatial Spillover Effects: Quasi-Experimental Evidence From China.”Frontiers in Environmental Science 9: 824298. https://doi.org/10.3389/fenvs.2021.824298.

70.

D.J.

(2021). “Evaluating the employment effect of China’s carbon emission trading policy: Based on the perspective of spatial spillover.”Journal of Cleaner Production 292: 126052. https://doi.org/10.1016/j.jclepro.2021.126052.

71.

Shi

Guo

Yang

(2021). “Economic policy uncertainty (EPU) and firm carbon emissions: Evidence using a China provincial EPU index.”Energy Economics 94: 105071. https://doi.org/10.1016/j.eneco.2020.105071.

72.

Zhang

(2020). “The effect of China’s pilot carbon emissions trading schemes on poverty alleviation: A quasi-natural experiment approach.”Journal of Environmental Management 271: 110973. https://doi.org/10.1016/j.jenvman.2020.110973.

73.

Zhang

Duan

(2020). “China’s pilot emissions trading schemes and competitiveness: An empirical analysis of the provincial industrial sub-sectors.”Journal of Environmental Management 258: 109997. https://doi.org/10.1016/j.jenvman.2019.109997.

74.

Zhang

(2017). “Correcting the uneven burden sharing of emission reduction across provinces in China.”Energy Economics 64: 335–345. https://doi.org/10.1016/j.eneco.2017.04.005.

75.

Zhang

Adom

P.K.

(2018). “Energy efficiency transitions in China: How persistent are the movements to/from the frontier?”The Energy Journal 39(6): 147–170. https://doi.org/10.5547/01956574.39.6.lzha.

76.

Zhu

Fan

Deng

Xue

(2019). “Low-carbon innovation induced by emissions trading in China.”Nature Communications 10: 4088. https://doi.org/10.1038/s41467-019-12213-6.

77.

Zhu

Wang

(2022). “Evaluating regional carbon emissions trading in China: Effects, pathways, co-benefits, spillovers, and prospects.”Climate Policy 22(7): 918–934. https://doi.org/10.1080/14693062.2022.2054765.

Supplementary Material

Please find the following supplemental material available below.

For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.

For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.

0.00 MB

0.03 MB