Abstract

How developing countries can effectively promote cities’ carbon emission reduction through the carbon emission trading system (ETS) is a topic worthy of attention in the global carbon reduction campaign. Policy changes in China's ETS provide a unique opportunity to measure whether ETS impacts carbon emissions through two-way FDI. Hence, this paper employs difference-in-differences (DID) method to test the causal impact of ETS pilot policy on emissions through two-way FDI. The specific results are shown below. We find that the ETS pilot policy's emission reduction policy significantly inhibited pilot cities’ carbon emissions through two-way FDI. The emission reduction effect is evident in cities with higher administrative levels, better location advantages, and a higher degree of nationalization and energy demand. The mechanism test shows that ETS positively impacts urban carbon emission reduction through the scale, industrial structure, and technical effects of two-way FDI. Among them, the positive effects of technical effect and scale effect are relatively large. The conclusion of this study provides policy enlightenment for giving full play to the carbon reduction effect of the ETS policy. At the same time, it provides experience reference for other developing countries to design ETS for carbon emission control in opening to the outside world. 

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