The carbon emission trading policy of China : does it really boost the environmental upgrading?

China's rapid industrialization has led to massive resource consumption, and the country has recently been highlighted as the World's top carbon emitter. To pursue a sustainable economy via environmental upgrading, reductions in carbon emission levels are of great concern. The carbon emission reduction policy (CETP) is an environmental regulation aimed at cutting emissions and achieving environmental protection. Based on panel data of pilot and non-pilot regions, this study investigated the policy impact of the CETP on carbon emission reduction through difference-in-differences (DID). The findings, based on pooled OLS (ordinary least squares) and LSDV (least square dummy variable) regressions, revealed that the carbon emissions of the pilot regions (Beijing, Tianjin, Shanghai, Guangdong, Chongqing, and Hubei) had reduced by 12 percent more than the non-pilot regions. Thus, this implies that the CETP causes environmental upgrading. The results were further verified using a number of robustness checks, including parallel trends, placebo test, Granger causality test, and DID regression with a longer sample period. Based on the study findings, it was concluded that to achieve higher upgrade levels related to the environment, the CETP needs to be encouraged and improved for nationwide implementation. Furthermore, sustainable economic development in China also needs strict environmental regulations and policy measures.