Abstract A major challenge in achieving deep decarbonization is whether the simultaneous implementation of multiple low-carbon policies in the power sector undermines the marginal abatement incentives generated by carbon markets. Using provincial panel data from 1995 to 2021, this study develops an econometric framework that combines multi-period difference-in-differences with two-stage least squares to assess how the Renewable Portfolio Standard (RPS) reshapes the effectiveness of the Emissions Trading Scheme (ETS), with a focus on policy interactions that attenuate marginal abatement incentives in the carbon market and the associated transmission mechanisms. The results show that although the RPS alone significantly reduces carbon intensity in the power sector, higher RPS quota weights tend to compress the marginal abatement scope available to the ETS, thereby weakening the ETS's incremental incentive effects. Mechanism analysis reveals that under elevated RPS obligations, firms are more inclined to achieve compliance through structural adjustments in their generation mix. This reconfiguration reduces reliance on carbon trading, which in turn suppresses market activity and weakens the price signal and incentive function of carbon pricing. In provinces with high RPS quota intensity, carbon market incentives tend to be crowded out, while in regions with lower weights, policy complementarities in emission reduction are more evident. A lack of policy coordination can cause the RPS to suppress ETS price signals. Accordingly, this paper proposes regionally differentiated coordination strategies, including optimizing the composition of RPS quotas and introducing a carbon price floor, to improve the carbon market's operational efficiency and institutional resilience. • Demonstrates that RPS mandates dilute carbon price signals and weaken ETS incentives. • Shows how RPS quota intensity moderates ETS performance. • Validates mechanisms linking energy mix shifts to carbon pricing dynamics.
Chai et al. (Wed,) studied this question.