Engaging the Public, Stabilizing Markets: An Ex-Post Evaluation of China's Carbon Inclusion Policy

Engaging households and small-to-medium enterprises (SMEs) in climate action remains a critical global policy challenge, with past mandatory approaches such as Personal Carbon Trading (PCTs) largely failing due to high administrative costs and public resistance. This paper provides one of the first rigorous ex-post evaluations of China's "Carbon Inclusion" (CI) policy, an innovative governance mechanism that circumvents these failures. The policy uses a voluntary, incentive-based framework, leveraging digital platforms to create a market-based linkage between decentralized abatement actions and the formal compliance carbon market. Using a quasi-natural experimental design (2010-2022), we find the policy successfully addresses key design flaws inherent in previous schemes. Counter-intuitively, and contrary to fears that linking markets imports volatility, we find that integrating these voluntary credits enhanced market liquidity and significantly stabilized carbon prices in the compliance market. Furthermore, the policy generated significant co-benefits, stimulating regional innovation in both green and, via technological spillovers, non-green technologies. These findings demonstrate that a voluntary, digitally-enabled, demand-side policy is not only viable but can also strengthen the functionality of existing market instruments. It offers a scalable and effective blueprint for other nations seeking to unlock low-cost abatement potential and build broad public participation in the climate transition.