Air quality improvement effect and future contributions of carbon trading pilot programs in China

The carbon trading policy is a market-based tool aimed at reducing carbon emissions and may simultaneously yield a combined air quality improvement effect. This study employs a two-way fixed-effect model to estimate the causal relationship between daily carbon trading volumes and air pollution from 2015 to 2020. Results show that a one percent increase in daily carbon trading volumes leads to a reduction of 0.23% in PM2.5 and 0.26% in PM10. In addition to particulate matter, the carbon market can significantly reduce SO2 and air quality index. We also examine provincial and regional heterogeneities and find an apparent reduction effect in Beijing, Guangdong, Hubei, Tianjin, and cities in the more economically developed eastern region. Notably, our estimations indicate that the carbon market’s impact on reducing air pollution is most significant annually during the carbon quota compliance period and tends to intensify over the years. Furthermore, we predict the carbon trading scale to meet China’s stringent future air quality improvement target, indicating that the carbon trading volumes are projected to be 450 million tons in 2035 under the high contribution scenarios. These findings can provide insightful policy implications for China and other countries to establish more flexible and well-rounded carbon trading policies.