Evaluating Power Sector Emissions under China's Regional Carbon ETS Pilots : A View from Space

To gain institutional and technical know-how for a national carbon market, since 2013 China has experimented with eight regional carbon emission trading system (ETS) pilot programs. The prominence of these policy experiments and their unusual tradable performance standards (TPS) design have generated broad interest in evaluating their performance. However, new environmental regulations overlap with the ETS pilots, making obtaining an unbiased estimate of their effects challenging. By carefully controlling for the effects of major air pollution and power sector regulations in staggered and dynamic difference-in-differences models, this study provides the first ex post evaluation of the effects of the ETS pilots on emissions from coal-fired thermal power generation facilities. To overcome limited data availability, this study uses facility-level SO2 emissions, derived from a NASA Aura/OMI satellite data product, as a proxy for electricity output and CO2 emissions. Contrary to common belief, results show that although SO2 emissions of all facilities declined steadily over the period 2010-2019, SO2 emissions of treated facilities increased by about 5-7\% relative to those of untreated facilities. Moreover, the relative increase in SO2 emissions of treated facilities grew over time. To provide an economic explanation of the empirical results, a model is developed to show that the implicit output subsidy from the TPS design could increase the output of cleaner facilities, leading to more SO2 emissions