Urban carbon emission intensity under emission trading system in a developing economy: evidence from 273 Chinese cities

The international community has generally recognized the key role of developing countries’ cities in reducing carbon emissions, an elemental way to mitigate climate change. However, few have empirically analyzed the impact of market-based instruments such as emission trading system on urban carbon emissions in developing economies. This paper examines the effect of China’s pilot carbon trading markets, the first emission trading system in developing economies, on cities’ carbon intensity. We also explore the mechanism by which the emission trading system achieves its influence. The PSM-DID method is used to analyze the panel data including China’s 273 prefecture-level cities from 2010 to 2016. The results illustrate that the emission trading system significantly decreased pilot cities’ carbon intensity and this effect endured; as time progressed, the reduction effect was increasing. Through mediating effect analysis, we find that the emission trading system reduced the carbon intensity via increasing the proportion of tertiary industry output value in GDP and decreasing the energy intensity. Overall, the empirical results suggest that the Chinese government should drive the establishment and improvement of a national carbon market, proactively adjust industry structure, and consider the possible influence caused by the potential energy rebound effect.