Does the Carbon Emissions Trading Scheme Improve Carbon Total Factor Productivity? Evidence from Chinese Cities

Abstract

Improving carbon total factor productivity (CTFP) is required for China’s sustainable development, and the carbon emission trading scheme (ETS) is crucial to achieving this goal. In this paper, we calculate the city CTFP using meta Malmquist-Luenberger (MML) index from 2008 to 2019 and decompose it into efficiency change (EC), best practice gap change (BPC) and technology gap change (TGC). Then we construct a staggered Difference-in-Difference (DID) strategy to investigate the impact of regional ETS pilot policy on city-level CTFP using city panel data from 2008 to 2019. The main results show that the ETS pilot policy can increase CTFP by 3.3% in ETS cities compared to non-ETS cities. Mechanism tests suggest that the growth in CTFP mainly results from an increase in efficiency change and best practice gap ratio. Moreover, we use the CTFP calculated from the Solow residual instead of the CTFP obtained from the meta Malmquist–Luenberger index. We also perform other robustness tests to exclude the interference of potential threats to the results.