How emissions trading system inhibits carbon emission intensity: evidence from global carbon markets

Abstract

As a market-based climate governance instrument integrating both incentives and constraints, the Emissions Trading System (ETS) has attracted considerable attention for its emission reduction effectiveness. Exploiting the global variation in ETS adoption across countries, this study employs a multi-period difference-in-difference model to examine the mitigation effects of ETS implementation on carbon emission intensity across diverse countries and to identify the underlying mechanisms. The empirical results demonstrate that ETS implementation significantly reduces carbon emission intensity in participating countries, and these findings remain robust after a series of robustness checks. The emission reduction effect of ETS operates primarily through optimizing energy consumption structure and stimulating green technology innovation. Financial development and the maturity of the carbon market can strengthen the mitigating effect of the ETS on carbon emission intensity. However, we also find that ETS implementation may induce global carbon leakage, and this trade-off effect exerts adverse impacts on global carbon abatement. These findings provide important implications for strengthening international carbon market cooperation, improving carbon market linkages, and advancing the development of a globally integrated carbon market.