The Strange Case of Climate Policy and Economic Development: An Analysis of the Porter Hypothesis in the Context of Emission Trading Pilots in China

Abstract: Due to the climate crisis, more developing and emerging economies are considering to implement climate policies. However, since economic development remains high on their respective agendas, understanding economic consequences of such policies is crucial. The Porter hypothesis suggests in this respect that climate policy could benefit growth under certain circumstances by encouraging innovation, technological upgrading and structural change towards high-tech sectors. The paper analyses this hypothesis in the context of emission trading pilots in China, in particular investigating how the policy affected overall economic outcomes, innovation and structural change. To this end, a difference-in-difference analysis comparing pilot and non-pilot provinces as well as an in-depth case study of Beijing are used. The latter employs a proxy for strictness and coverage as an explanatory variable in first-differenced OLS regressions. The results confirm the effectiveness of the policy in reducing energy consumption and CO2 emissions, and both analyses show a significant positive effect on economic outcomes and innovation. The analyses additionally indicate different effects on low- and high-tech sectors in Beijing. High-tech sectors reduce their energy consumption, increase investment in research and improve both profits and output. In contrast, low-tech sectors neither reduce energy consumption nor increase research investment and, likely as a consequence of compliance costs, their output and profits suffer from the policy. In conclusion, the paper confirms the Porter hypothesis and a positive economic impact of the policy, most likely due to increased innovation and structural change.