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Trading characteristics of emissions trading scheme and carbon emission reduction efficiency: Evidence from China

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  • Li, Jiangyuan
  • Ding, Tao
  • Tan, Ruipeng
  • Liang, Liang

Abstract

Emissions Trading Scheme (ETS) has been widely implemented as a key measure to address climate challenges, yet its efficiency in reducing carbon emissions (CEs) still faces numerous challenges. To promote the development of the global carbon market and enhance CEs reduction efficiency, this study examines the impact of the trading characteristics of China's ETS on its CEs reduction efficiency using sample data from Chinese prefecture-level cities between 2007 and 2019. The baseline regression results indicate that the carbon reduction effect of ETS is associated with trading scale: each million tons of carbon trading volume (CTV) reduces CEs by an average of 1.69 million tons, and each million yuan of carbon trading turnover (CTT) reduces CEs by an average of 0.103 million tons. These findings remain robust across various tests. Mechanism analysis reveals that the ETS drives corporate CEs reduction by increasing liquidity pressure on enterprises and raising their awareness of emission reduction. Further analysis of trading characteristics shows that increased volatility or illiquidity in carbon trading diminishes the carbon reduction effect per unit of CTV and CTT. Additionally, this study identifies a non-trading carbon reduction effect of ETS, with the deterrence effect being a significant source. Further analysis reveals that the CEs reduction effect of CTV and CTT steadily rises over time, with a spillover effect and a hysteresis effect lasting one year. Finally, based on the findings, this study proposes several recommendations to enhance the CEs reduction efficiency of ETS.

Suggested Citation

  • Li, Jiangyuan & Ding, Tao & Tan, Ruipeng & Liang, Liang, 2026. "Trading characteristics of emissions trading scheme and carbon emission reduction efficiency: Evidence from China," Energy Economics, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:eneeco:v:153:y:2026:i:c:s0140988325009028
    DOI: 10.1016/j.eneco.2025.109072
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