*Article* **An Analysis of the Impact of the Emissions Trading System on the Green Total Factor Productivity Based on the Spatial Difference-in-Differences Approach: The Case of China**

**Susheng Wang 1,2, Gang Chen 1,\* and Xue Han <sup>1</sup>**


**Abstract:** How to effectively identify the spatial effect of the emissions trading system(ETS) on urban green total factor productivity(GTFP) generated through the linkage of economic factors between cities is a necessary part of scientifically evaluating the effect of ETS policy in emergingmarket countries. This study aims to examine the spatial effect, mechanism, and heterogeneity of the ETS on urban GTFP based on the panel data of 281 cities from 2004 to 2017 in China, applying spatial difference-in-differences(DID) Durbin model (SDID-SDM) with multidimensional fixed effect (FE). The results show that ETS significantly improves the GTFP of the pilot cities, produces a spatial spillover effect and the results are robust to the placebo test, propensity score matching SDID (PSM-SDID) test, and Carbon-ETS interference test. Further analysis shows that the policy effect is mainly driven by improving energy efficiency, promoting green innovation, and optimizing the industrial structure. In addition, we found that ETS performs better in regions with a high degree of marketization, strong environmental law enforcement, and a low proportion of coal consumption. In general, the identification method of this study can be used as a scientific reference for conducting similar research in other emerging countries.

**Keywords:** emissions trading system; green total factor productivity; spatial difference-in-difference; energy efficiency; green innovation; industry structure; spatial heterogeneity
