Authors: Tony He Tang, Helen X. H. Bao
Year: 2026
Status: Revised and Resubmitted
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Abstract
This study examines how the Carbon Emission Trading System (ETS) mitigates the emission instability caused by political shocks. We document a phenomenon in Chinese cities where carbon emissions increase during local leadership turnovers (“the cat is away”), contrasting with the emission reductions during central inspections (“the cat is around”). However, the introduction of an ETS effectively moderates these fluctuations. The stabilizing effect of the ETS operates through two mechanisms: it reinforces consistent government regulation and curbs firms’ opportunistic behavior. Additionally, we find that a higher carbon price improves emission control while simultaneously cushioning the impact of political shocks.