The effects of carbon trading on resident income: a theoretical and empirical study on the pilot carbon market in China

Establishing an efficient carbon emissions trading market is a priority to achieve the goal of carbon peaking and carbon neutrality. In the context of income inequality and emissions inequality, this study examined the efficiency of carbon trading in China from the perspective of resident income. First, this paper used the Cobb–Douglas (C-D) production function to incorporate carbon intensity into the production network model and obtained the expression of household income by solving the Walras equilibrium. Secondly, this study put forward a theory that Carbon trading affects the income level of individuals. Finally, in order to test the theory, the study used the differences-in-differences (DID) method, provincial panel data from 2005 to 2019, and the quasi-natural experiment of China’s carbon emissions trading pilot. The results indicated that this policy could reduce the per capita disposable income level. Further heterogeneity research showed that although the emission reduction effect was significant, the pilot policy failed to save emission reduction costs and improve residents’ welfare. The low efficiency of the carbon market was mainly attributed to the insufficient liquidity of the pilot carbon market. Therefore, it not only failed to achieve efficiency but also increased unnecessary costs, which had a negative impact on income. In addition, the consumption patterns of residents and the industrial-oriented economic structure exacerbated the decline in income.