The impact of carbon market pilots on air pollution: evidence from China

As China's economic development enters a transitional stage, the government has put forward higher requirements for efficient air pollution control. Different from the traditional environmental regulation methods, China's carbon market pilots (CMP) can use market mechanism to achieve carbon emission reduction policy goals while also providing more efficient control methods for air pollution. Using the unique daily air pollution data of 324 prefecture-level and above cities in China from December 1, 2013, to December 18, 2017, and matching them with the daily data of carbon allowance trading in each CMP, we employ the time-varying difference-in-differences (DID) method to explore the casual relationship between CMP and air pollution, and its influence mechanism. Our results show that (1) the establishment of CMP can reduce air pollution by at least 4.9%, especially on sulfur dioxide, inhalable particulate matter, fine particles, and carbon monoxide. This conclusion is still robust after we use the instrumental variable (IV) method to deal with endogeneity. (2) Mechanism analysis shows that the reducing effect of CMP on air pollution is achieved mainly through three channels, including energy consumption reducing, technological progressing, and industrial structure upgrading. (3) Since CMP have just been established, government regulation plays a stronger role than the market mechanism in the process of CMP affecting air pollution. However, with the continuous improvement of CMP, the market mechanism has also played an increasingly important dynamic effect.