Low-carbon innovation induced by emissions trading in China

Emissions trading scheme (ETS) has been adopted by an increasing number of countries and regions for carbon mitigation, but its actual effect depends on specific program design and institutional context. 

How is that implemented in China?


Emissions trading scheme aims to minimize abatement cost via trading under an emission cap. It has been an increasingly popular policy for climate mitigation. The popularity of ETS may also help to link national and regional climate policies for more efficient mitigation globally. 

China initiated seven regional ETS pilots in two provinces and five cities during 2013–2014 before starting the national market in 2017. The seven ETS pilots represent the country’s first explicit use of a market-based instrument for climate mitigation.

Emission trading scheme

We explore firm-level evidence of policy effects directly from emissions trading and differential program designs in China since 2013. 

We focus on the effect of ETS pilots on low-carbon innovation, based on a quasi-experimental design and disaggregated patent information. 

The identification strategy for the effect of the ETS on innovation has been matching-adjusted DID that proceeded in two steps, used for estimation of both themain policy effects and spillovers.  

Rate and direction of ETS-induced innovation


China’s pilots increase low-carbon innovation of ETS firms by 5–10% without crowding out their other technology innovation.


(1) The direct effect of the ETS contributed to around 0.4–2% of the more than 16,000 low-carbon patents filed by firms in ETS regions during 2014–2015. 


(2) The ETS caused a firm to file one (0, 2) additional patent of other technologies.


Both are similar to the effects of the EU ETS. 

Spillovers of policy effects to non-ETS firms


The increase from ETS firms accounts for about 1% increase of the regional low-carbon patents, while a similar increase from large non-ETS firms is also induced by the ETS.

It was not likely substantial. Spillovers were limited to large unregulated firms in sectors already or likely covered by the ETS. Further increase of the policy impacts requires a broader program coverage. 

Potential mechanism of the ETS in facilitating innovation


Most importantly, the effect is not associated with permit price, auction, or firm characteristics, but is driven by mass-based allowance allocation.

The mass-based approach actually drove the overall policy effect while the rate-based approach had no effect.


Junming Zhu

School of Public Policy and Management, Tsinghua University


Yichun Fan

MIT Sustainable Urbanization Lab, Department of Urban Studies and Planning, MIT


Xinghua Deng

School of International Business, Southwestern University of Finance and Economics


Lan Xue 

School of Public Policy and Management, Tsinghua University


Junming Zhu, Yichun Fan, Xinghua Deng, Lan Xue, "Low-carbon Innovation Induced by Emissions Trading in China" Nature Communications.

Graphics from Environmental Protection Authority, New Zealand. Graphs from the paper.

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