Does the SO2 emissions trading scheme encourage green total factor productivity? An empirical assessment on China's cities.

As a market-based environmental regulation tool, emissions trading scheme for SO2 (SO2 ETS) has been carried out in China for decades, so impacts of SO2 ETS have become a vital issue to the society. Based on the SO2 ETS of China in 2007, this paper attempts to test and verify impacts of the scheme on environment and economy, especially on green total factor productivity (TFP). We firstly combine biennial weight-modified non-radial direction distance function and Luenberger productivity indicator to measure and decompose the green TFP of 280 cities in China over the period 2003 to 2016, and apply a difference-in-differences method (DID) with fixed effect models to investigate whether SO2 ETS achieves a win-win scenario of "emission reducing" and "efficiency increasing." The results show that the scheme significantly may decrease SO2 emissions and SO2 intensity by 12.3% and 11.0%, respectively, in ETS regions while no obvious impact on GDP. In terms of green TFP, we find SO2 ETS inhibits the growth of green TFP, and the negative impact mainly caused by the deterioration in efficiency change. Therefore, we hold that SO2 ETS is effective for improving environment, but it is still difficult to achieve the promotion of green TFP simultaneously.