Exploring the effect of emission trading system on marginal abatement cost-based on the frontier synthetic difference-in-differences model

Abstract

Evaluating the cost-effectiveness of emission trading system (ETS) will explore how to control the total emission amount while minimizing the economic cost. Most related studies employ the difference-in-differences (DID) and multi-period DID models. However, this research highlights the superiority of construction technique and estimation results in the synthetic DID model, and applies it to a new scenario for evaluating the cost-effectiveness of China's pilot ETS. From the construction technique, the synthetic DID model synthesizes more desirable control groups and allows more flexibility in matching treatment units with extreme values by setting weight combinations and intercept terms. From the estimation results, the treatment effects are considered more reliable because ideally satisfy the parallel trend assumption. Specifically, the synthetic DID model indicated that the pilot ETS effectively reduced the marginal abatement cost (MAC) by 24.39%, whereas the traditional DID and multi-period DID models may have overestimated the policy effects by 98.48% and 71.09%. The main reason was the MAC has shown a downward trend before the policy implementation. Moreover, the estimation results of heterogeneity analysis and mechanism test in different models were also different. The synthetic DID model integrates the strengths of the DID model and synthetic control method (SCM), making a methodologically grounded contribution to the existing policy evaluation system.

Keywords: Emission trading system; Heterogeneity analysis; Marginal abatement cost; Mechanism test; Synthetic difference-in- differences model.