Does Energy Quota Trading Alleviate Regional Carbon Distortion? Evidence from a Quasi-Natural Experiment in China

Abstract Global climate action increasingly requires balancing ambitious decarbonization with sustained economic growth, in which carbon distortion—the misallocation of carbon-emission capacity across economic activities—is a key manifestation of this tension. This study asks whether market-based energy governance can alleviate regional carbon distortion. We exploit the 2016 launch of China's Energy Quota Trading (EQT) pilot as a quasi-natural experiment and apply a difference-in-differences design to provincial panel data for 2010–2022. The EQT policy significantly reduces carbon distortion, and the effect strengthens over time and survives instrumental-variable, synthetic-DID, double/debiased machine learning (DDML), placebo, and alternative-sample robustness checks. Mechanism analyses show that green technological innovation and industrial upgrading are two transmission channels. The moderating-effect analysis shows that better transportation infrastructure, higher human capital, and greater informatization strengthen the distortion-mitigating effect of EQT. These findings indicate that market-based environmental governance can improve carbon allocation efficiency at relatively low economic cost, offering implications for improving market-based energy governance during the low-carbon transition.