Analysis of emission reduction effects of carbon trading: Market mechanism or government intervention?

Carbon trading is a crucial policy to combat climate change and China's carbon market is considered one of the carbon markets to consider. Some studies have shown that China's carbon trading scheme promotes carbon reduction. However, others have shown that low carbon prices and poor liquidity characterize China's carbon market. How can China's carbon trading mechanism achieve the expected emission reduction when the market mechanism has not been fully established? To answer it, this article collected 30 Chinese provinces' panel data from 2005 to 2019 and explored the relationship between the implementation of carbon trading policies and carbon emission reduction through a multi-period difference-in-differences model. In addition, a series of robustness tests were performed. The results indicate that carbon trading does effectively curb carbon emissions. But this policy effect is not achieved through the market mechanism. In the pilot phase of China's carbon market, government intervention played a significant role in reducing carbon emissions. The results also suggest that the carbon trading mechanism promotes carbon emission reduction through energy consumption rather than industrial structure. This study enriches the empirical evidence of carbon trading and provides valuable references for policymakers and the construction of carbon markets.