Does cap-and-trade policy promote Forest cover? Evidence from China

Cap-and-trade policies have been widely implemented in areas such as pollutant emissions, energy, and water rights in order to achieve environmental regulatory objectives. In 2018, Linyi City, China, implemented the Innovative Forest Cover Trading Policy (IFCTP), extending the application of cap-and-trade policies to the forest resources sector in an effort to stimulate afforestation initiatives and increase urban forest coverage. However, the IFCTP's effectiveness in increasing forest coverage remains unproven. This study evaluates the impact of IFCTP on forest cover expansion by improving the Synthetic Control Method (SCM), which incorporates panel data from 283 prefecture-level cities in China (2003–2021) to select cities with similar characteristics to Linyi. This improved SCM allows for a more accurate counterfactual “Synthetic Linyi" for comparison. Additionally, land use data, mediation analysis, and semi-structured interviews are used to explore the mechanisms behind the policy's effects. The analysis reveals that the IFCTP led to a 2.2% increase in Linyi's forest coverage within four years, primarily through labor force input and forest management improvements. These findings provide broader insights into the applicability of similar afforestation policies in regions with comparable ecological and socio-economic conditions, highlighting the potential of market-based policies like IFCTP to combat deforestation and foster sustainable forest growth. •An improved Synthetic Control Method (SCM) is proposed to assess the effectiveness of Innovative Forest IFCTP.•IFCTP is an effective cap-and-trade policy in enhancing forest coverage.•Afforestation funding, labor, and forest management mediate how IFCTP improves forest coverage.