Exploring the impact of emissions trading schemes on income inequality between urban and rural areas

Abstract

While the Paris Agreement and 2030 Agenda for Sustainable Development are the two most important global governance agendas, in practice they have been implemented in isolation. This calls for the need to focus on the potential policy synergies between emission reduction policies and Sustainable Development Goals (SDGs). This paper therefore aims to explore whether the emissions trading scheme (ETS) policy-one of the most effective ways to fulfill the target determined by the Paris Agreement, would facilitate reducing income inequality (SDG10). By combining a difference-in-difference estimation and propensity score matching technique based on a balanced panel dataset for 31 Chinese provinces from 2010 to 2018, we quantify the impact of ETS policy on income inequality between urban and rural areas in China. The results demonstrate that compared with the regions without ETS, the Theil index between rural and urban areas with ETS decreased by 0.018 on average in China. In addition, the ETS would perform better in regions with low urbanization level and high coal dependence. Hence it is vital to speed up the establishment of a unified ETS market in China. This is particularly true for inner underdeveloped regions in China. These findings proven to be robust according to a series of tests challenge the view that SDG 10 has the least relevance to climate action and suggest rethinking the effectiveness and applicability of ETS. Therefore, our research can not only serve as a reference for the development of ETS in China and elsewhere, but also inform decision makers who are seeking for policy synergies between the Paris Agreement and SDGs.

Keywords: Difference-in-difference; Emissions trading scheme; Income inequality; Mitigation effect; Policy synergy; Sustainable Development Goal (SDG).