Can the Carbon Emissions Trading System Improve the Green Total Factor Productivity of the Pilot Cities?-A Spatial Difference-in-Differences Econometric Analysis in China

The carbon emission trading system (CETS) is an important market-oriented policy tool for the Chinese government to solve the problem of high emissions and achieve the growth of green total factor productivity (GTFP). This study makes up for the neglect of the spatial effect of CETS policy in previous studies and adopts the spatial difference-in-differences (DID) Durbin model (SDID-SDM) method of two-way fixed effects to scientifically identify the direct and spatial effects influencing the mechanisms and heterogeneity of CETS on urban GTFP based on the panel data of 281 cities in China from 2004 to 2017. It found that China's CETS significantly improved the GTFP of pilot cities but produced a negative spatial siphon effect that restricted the growth of GTFP in surrounding cities. Benchmark results are robust under the placebo test, the propensity score matching SDID (PSM-SDID) test, and the difference-in difference-in-differences (DDD) test. The mechanism analysis shows that the CETS effect is mainly realized by improving energy efficiency, promoting low-carbon innovation, adjusting the industrial structure, and enhancing financial agglomeration. In addition, we find that policy effects are better in cities with high marketization, strong monitoring reporting and verification (MRV) capabilities, high coal endowment, and high financial endowment. Overall, China's CETS policy achieves the goal of enhancing GTFP but needs to pay attention to the spatial siphon effect. In addition, our estimation strategy can serve as a scientific reference for similar studies in other developing countries.