Carbon Trading Mechanisms and Government Investment Policies Impact Sustainable Economic Growth and a Green Environment

ABSTRACT Within the constraints of the carbon peaking and carbon neutrality goals, China must intricately balance between carbon emissions and economic growth. The market regulation mechanisms of the carbon emissions trading scheme and the macro‐control mechanisms of local government investment robustly impact carbon emissions (in kilotons, kt) and intensity of carbon emissions (in metric tons per million GDP, t/million). Economic growth varies greatly across various regions in China. We apply the dynamic stochastic general equilibrium (DSGE) model to analyze the dynamics of economic growth in different carbon trading schemes across the developed eastern regions and the underdeveloped central and western regions. We incorporate the levels and the differences in economic growth across regions. Our research reveals the following discoveries: First, when regions have mutually independent carbon trading markets, carbon emissions increase more in underdeveloped regions, with higher local economic growth. Second, with a unified carbon trading mechanism, the gaps in carbon emissions and economic output between developed and underdeveloped regions widen further. Developed regions have higher incremental carbon emissions and lower incentives to reduce emissions. Third, as the competition between regional governments for economic growth and carbon emissions intensifies, each region's economy grows significantly. Interestingly, as governments invest in their economies, incremental carbon emissions in developed regions are substantially lower than in underdeveloped regions. Our economic model reveals a critical reference for explaining the imbalance of regional economic development in the context of China's low‐carbon emissions.