In a groundbreaking empirical study spanning over a decade, researchers have unveiled compelling evidence on how market-incentive environmental regulations can significantly enhance total factor energy efficiency (TFEE) across urban landscapes in China. Leveraging panel data from 280 prefecture-level cities between 2010 and 2020, this rigorous analysis sheds light on the potent effects of China’s Energy-consuming Right Trading Pilot (ERTP) on driving sustainable energy use and industrial transformation.
The study meticulously investigates the nuanced relationship between ERTP implementation and TFEE improvements. TFEE, a critical metric capturing the efficiency with which energy inputs are converted into economic outputs, serves as a comprehensive indicator of a city’s environmental and industrial performance. By applying sophisticated econometric methods that address endogeneity and robustness concerns, the findings confirm that ERTP not only promotes cleaner energy consumption but also substantially raises TFEE levels in pilot areas.
Interestingly, the positive impact of ERTP is not uniformly distributed across all cities. It reveals a marked enhancement in cities possessing superior locational advantages and a higher degree of urbanization. Resource-dependent cities also disproportionately benefit from the policy, highlighting that initial conditions and resource endowments critically influence policy outcomes. This heterogeneity underscores the importance of tailoring regulatory frameworks to local economic and geographic contexts to optimize environmental and energy efficiency gains.
Digging deeper into the mechanisms by which ERTP drives TFEE improvements, the study identifies two primary channels: industrial structure upgrading and the advancement of green innovation capabilities. The regime incentivizes industries to transition from energy-intensive and polluting sectors towards more technologically advanced and environmentally sustainable activities. Simultaneously, it fosters a culture of innovation, catalyzing R&D in green technologies and new energy solutions that amplify energy efficiency across the production spectrum.
These transformational effects are further complemented by a pronounced industrial transfer phenomenon. As ERTP compels stricter emission control and efficiency mandates in pilot cities, industries with high energy consumption are either upgraded or relocated, leading to a realignment of industrial spatial patterns. However, a cautionary note emerges with the identification of a negative spatial spillover effect: adjacent non-pilot cities experience setbacks in their TFEE, likely due to the displacement of polluting industries into areas with laxer regulatory regimes.
From a policy perspective, the implication is clear: a one-size-fits-all approach is insufficient to harness the full potential of environmental regulation instruments like ERTP. The researchers advocate for differentiated management strategies that grant local governments the autonomy to adjust quota allocation, trading mechanisms, and performance criteria in alignment with their unique resources, industrial landscapes, and environmental capacities. Creating a dynamic feedback loop through regular policy evaluation is crucial to maintain the relevance and effectiveness of the programs.
Furthermore, the establishment of sustainable green incentives emerges as a vital component of long-term success. Dedicated funds targeting green technology innovation could steer social investment towards critical domains such as energy conservation, emission reduction, clean energy adoption, and comprehensive industrial green transformation. By combining financial incentives—ranging from tax deductions to accelerated depreciation—with accessible green credit and bond markets, governments can stimulate enterprise-driven green transformation efforts, fostering an endogenous motivation for environmental responsibility.
On the enterprise side, accelerating industrial upgrading presents both an opportunity and a challenge. Raising thresholds for entry and energy efficiency in energy-intensive sectors effectively weans out outdated, inefficient capacity and drives industrial optimization from the ground up. However, this transition demands coordinated action to avoid chaotic relocation of polluting industries and instead promote an orderly “green gradient” industrial transfer mechanism that leverages regional comparative advantages in developing high-value green sectors like new energy and intelligent manufacturing.
The study also emphasizes the creation of regional collaborative governance frameworks that can effectively mitigate the negative spatial spillover effects observed in non-pilot cities. By establishing cross-regional ecological and environmental information-sharing platforms, policymakers can enable real-time monitoring of pollution, facilitate coordinated policy enforcement, and strengthen joint supervisory efforts. This integrated governance approach is essential to prevent the phenomenon of “pollution transfer” and ensure collective progress towards national energy efficiency and environmental goals.
More broadly, the research underscores that energy-consuming rights trading pilots serve not simply as isolated regulatory experiments but as catalytic platforms that nurture sustainable industrial restructuring and innovation ecosystems. The interplay of market incentives, regulatory adaptation, and interregional cooperation forms a comprehensive strategy that can dynamically align economic growth with environmental stewardship.
Beyond China, these insights present a valuable model for other emerging economies grappling with similar challenges of balancing industrial development with energy constraints and environmental imperatives. The nuanced understanding of locational and structural differences can inform adaptable, context-sensitive policy design globally.
The study’s implications extend into the realm of green finance innovation and governance system design, suggesting that integrated public-private partnerships and proactive governance coordination can accelerate clean technology diffusion. The empirical confirmation of TFEE improvements through market-based instruments provides a robust evidence base to justify scaling up such mechanisms.
Innovations in data-driven environmental regulation, as demonstrated by this study, also highlight the role of advanced econometric methods and comprehensive data collection in enhancing policy evaluation accuracy. Leveraging big data and transparent monitoring systems will become increasingly important as countries pursue ambitious sustainability targets.
In conclusion, this extensive longitudinal investigation into China’s ERTP reveals a multifaceted impact on energy efficiency that transcends simple regulatory compliance. It ushers in an era where market incentives, local autonomy, innovation incentives, and coordinated governance converge to transform urban energy landscapes. The journey towards energy-efficient, green economies demands continuous adaptation and cross-sector collaboration, but as this study shows, well-designed environmental market mechanisms can be powerful levers driving this transition.
Given the pressing global urgency of climate change and sustainable development, the lessons drawn here invite policymakers, industry leaders, and academics worldwide to rethink and refine environmental regulation strategies. Harnessing market forces in tandem with innovation and regional collaboration promises a future where economic vitality and ecological balance are not trade-offs but complementary goals.
As this research shows, the path forward is not just about controlling emissions but fundamentally restructuring energy use patterns through thoughtful policy designs that take into account diverse regional realities and leverage green technology advances. The promise of enhanced total factor energy efficiency holds transformative potential for sustainable urban futures everywhere.
Subject of Research: The impact of market-incentive environmental regulation, specifically China’s Energy-consuming Right Trading Pilot (ERTP), on total factor energy efficiency across prefecture-level cities.
Article Title: Market-incentive environmental regulation and total factor energy efficiency: evidence from China’s energy-consuming right trading pilot.
Article References:
Qiu, X., Jin, X., Huang, S. et al. Market-incentive environmental regulation and total factor energy efficiency: evidence from China’s energy-consuming right trading pilot. Humanit Soc Sci Commun 12, 1926 (2025). https://doi.org/10.1057/s41599-025-06199-4
Image Credits: AI Generated
