Do CO2 emission 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.