China’s Climate Policy: Mandate-Basedvs. Market-Based Approaches

Lin Pengsheng1, Li Shuo*2

1 School of Economics and Management, Tsinghua University, Beijing, China

2 Faculty of Business and Economics, The University of Hong Kong

Abstract: Mandate-based and market-based mechanisms represent two primaryapproaches to achieving policy objectives, yet the debate over their relative effectivenessremains unresolved. The mandate-based approach is exemplified by pilot programs for lowcarbonprovinces and cities, referred to as “Low-Carbon Pilot Provinces/Cities”, whilethe market-based mechanism is reflected in pilot programs for carbon emissions tradingmarkets, or “Carbon Trading Pilot Programs”. This paper employs event study analysisto compare the carbon emission reduction impacts of these two approaches. Our findingsreveal that the Low-Carbon Pilot Provinces/Cities achieved emissions reduction primarilyby curbing economic output, without significantly reducing carbon emissions intensity. Incontrast, the Carbon Trading Pilot Programs led to an increase in total carbon emissions bydriving economic growth, even as they reduced carbon emissions intensity. A heterogeneityanalysis further indicates that the emissions reductions observed in the Low-CarbonPilot Provinces/Cities were predominantly concentrated in economically less-developedregions, whereas the increase in carbon emissions associated with the Carbon Trading PilotPrograms was more significant in regions with lower initial carbon emissions intensity.Against the backdrop of China’s efforts to achieve its carbon peak and neutrality goals, thispaper offers valuable insights for the design of effective climate policies.

Keywords: Low-Carbon Pilot Provinces/Cities; Carbon Emissions Trading Pilot

JEL Classification Codes: D62, H23, Q58

DOI: 10.19602/j.chinaeconomist.2025.01.05