Toward low-carbon transition: Does carbon regulation matter for spatial development inequality?

This study aims to investigate how carbon regulation shapes economic inequality in developing countries. Based on high-resolution satellite data, we exploit the shock of the Chinese central government gradually phasing in the emission trading scheme (ETS) across regions to conduct a staggered difference-in-difference estimation. We present strong evidence of the ETS's effectiveness in mitigating spatial development inequality. Our findings remain robust to different identification strategies and alternative measures. Plausible mechanisms driving our results may involve the reduction in the innovation gap and the improvement in factor allocation. Notably, cities with higher levels of marketization, carbon intensity, and digital finance development are more substantially impacted by the ETS. Furthermore, accounting for spatial interactions, the ETS implemented in pilot cities significantly alleviates spatial development inequality in neighboring non-pilot regions.