Market Based Emissions Policies

Investigators: CDEP Affiliate Douglas Almond with Shuang Zhang 

This project funds research that will evaluate how firms and consumers respond to market-based policies that are supposed to improve air quality and address environmental issues. The focus here is on testing hypotheses drawn from economic theory about how new environmental policies affect business and public health in the rapidly growing Chinese economy. China is about to adopt a new national program of cap-and-trade emissions policies. The research team will collect innovative measures of pollution, firm outcomes, and individual health. They will analyze these data to test the team's hypotheses about whether or not these policies will achieve the stated goals. Predicting and understanding the effects of these policies is important for many scientific reasons. What is more, the policies could potentially result in Chinese manufacturers facing much higher costs of environmental compliance, which would have important implications for worldwide trade and the comparative advantage of manufacturers in countries such as the United States that already have strong environmental controls. This project therefore will provide valuable new evidence to researchers around the world and policymakers in the United States who are charged with promoting US economic competitiveness.

The lack of reliable data are primary obstacles to understanding the world's most ambitious market-based environmental policy using data from a recently implemented comprehensive cap and trade program. The project will evaluate how emissions, firm outcomes, and individual health respond to this signature environmental policy. First the team will conduct a conventional program evaluation of the country's seven carbon trading pilot programs that were launched in late 2013. This is analysis is already feasible using conventional empirical approaches, such as difference-in-differences analysis. Second, they will extensive baseline measures for the 2017- launch of the national program as it comes online. Third, they will collect and assess innovative pollution and health measures and evaluate the nation's early experience with its incipient national program. The project emphasizes analysis of independent and objective metrics rather than official government measures. Heterogeneity in the program features by regional market furnishes a laboratory for identifying successful and unsuccessful program features. Rules governing the national program are currently being finalized and will be evaluated for the identification strategies they furnish.

The project is funded by the National Science Foundation and is part of CDEP’s Firms and Innovation Initiative.