How can market-oriented environmental regulation improve urban energy efficiency? Evidence from quasi-experiment in China's SO2 trading emissions system.

Improving energy efficiency helps achieve energy conservation and emission reduction. Examining whether China's SO2 trading emission system (TES) reform can enhance energy efficiency will provide empirical evidence for the institutional benefit of market-oriented environmental regulation in environmental governance. This paper employs the difference-in-differences (DID) method to examine the effect of SO2 TES on energy efficiency using panel data from 285 Chinese cities from 2003 to 2018. The empirical results indicate that: (1) SO2 TES significantly promoted green total factor energy efficiency and reduced energy intensity. This conclusion is still valid after the prerequisite assumption test and robustness test. (2) SO2 TES significantly promotes local energy efficiency and has significant spatial spillover effects on surrounding cities. (3) Promoting green technological progress, resource allocation, and curbing energy consumption, are the primary mechanisms for SO2 TES to improve energy efficiency. (4) SO2 TES's improvement in energy efficiency comes more from eastern, developed, small, resource-based, and non-old industrial cities. • SO2 trading emissions system (TES) improves energy efficiency. • TES has a spatial spillover effect on nearby cities. • Green innovation, resource allocation and energy saving effects are the channels. • The effect of the TES on energy efficiency is heterogeneous. [ABSTRACT FROM AUTHOR]