Do CO₂ emissions trading schemes deliver co-benefits? Evidence from Shanghai

ABSTRACT

While ex-ante evaluations of climate mitigation policies predict that co-benefits of improved air quality will enable the aggregate benefits of climate mitigation policies to outweigh their costs, there is little empirical evidence to support this assertion. In this study, we use data on weekly smokestack emissions of sulfur dioxide (SO₂) from firms participating in Shanghai’s carbon dioxide (CO₂) emissions trading scheme (ETS) to deliver one of the first ex-post evaluations on the co-benefits of China’s ETS. Using a panel-regression model in which all firms’ characteristics and seasonal effects are controlled, we find a significant negative association between CO₂ emissions prices and industrial SO₂ emissions (elasticity of −0.13). A closer examination reveals that most of these effects were driven by specific sectors (iron and steel) and during months in which firms were required to balance their annual CO₂ emissions. To ensure our results are not driven by confounding factors and our model’s assumptions, we conducted several falsification checks using SO₂ emissions from non-ETS firms and firms from a nearby city, using various model specifications. Our findings suggest that co-benefits from climate mitigation policies should not be taken for granted, and that policy designs and types of sector sources of emissions are important determinants of co-benefits.

Key policy insights

• The study provides empirical evidence for air pollution co-benefits of a CO₂ ETS using weekly smokestack-level data from Shanghai, China

• Evidence from the Shanghai ETS shows that a 1% increase in CO₂ prices in Shanghai is associated with a 0.13% decrease in SO₂ emissions

• These co-benefits, however, are limited to specific sectors (e.g. ferrous metals), and are not found in other major CO₂ emitting sources or sectors (e.g. power utilities)

• The relationship between CO₂ prices and co-benefits is also stronger during months in which firms are required to balance their annual CO₂ emissions using permits

KEYWORDS:

• Air pollution abatement
• co-benefits
• CO₂ emissions
• emissions trading schemes
• policy design and implementation

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 For instance, suppose a city implements a carbon tax to reduce GHG emissions. The cost of administering the policy and the impact of the tax fall directly on the city’s taxpayers and businesses. However, because GHG mitigation is a global public good (Tavoni et al., 2011), the benefits of abatement of global climate change are shared worldwide.

2 While there are many different types of co-benefits (e.g., biodiversity, economic growth, soil and water quality), existing studies have predominantly focused on co-benefits regarding air quality (Karlsson et al., 2020).

3 ‘China's carbon trading scheme makes debut with 4.1 mln T in turnover’. Source. Last accessed: Nov 15, 2021.

4 Global Carbon Atlas (http://www.globalcarbonatlas.org/en/CO2-emissions), last accessed: Oct 25, 2021.

5 U.S. Energy Information Administration international information (https://www.eia.gov/beta/international/data/browser), last accessed: Oct 25, 2021.

6 A list of major polluters can be found here: http://www.mee.gov.cn/gkml/hbb/bgt/201602/t20160204_329897.htm.

7 Online data sources are www.cneeex.com, www.chinatcx.com.cn, and www.tanpaifang.com.

8 There is a similar decreasing trend in coefficients even if we extend the number of lags to ten weeks. Results available upon request.

Additional information

Funding

Financial support from the National Natural Science Foundation of China (grant no #72134006, #71603267) and Singapore Ministry of Education - Singapore (start-up grant R603000237133) are gratefully acknowledged.