Does emission trading lead to carbon leakage in China? Direction and channel identifications

Unilateral emission trading may lead to carbon leakage. The leakage direction and channel are critical to multilateral emission mitigation. Despite the increasing number of investigations into the carbon leakage induced by emission trading, there is a lack of empirical research on the specific leakage channels related to the emission trading market. This paper develops a difference-in-difference-in-differences model to identify carbon leakage directions in emission trading pilots in China. The issue of whether market participation and industrial transfer are the specific leakage channels related to emission trading is also examined. Emission trading pilots lead to reverse carbon leakage, which moves from the non-pilot region to the pilot region. Market participation and industrial transfer are confirmed to be the specific leakage channels in emission trading. Of the two channels, market participation is the one that determines the reverse direction.