Unlocking Construction’s Green Potential: How Carbon Markets Drive Eco-Efficiency in China’s Building Sector

The Green Transformation of Construction Through Carbon Trading

China’s construction industry, responsible for significant carbon emissions and resource consumption, stands at a critical juncture in its sustainability journey. The implementation of carbon trading mechanisms represents a powerful market-based approach to accelerating green transformation in this vital sector. Unlike traditional manufacturing or energy industries, construction faces unique challenges including fragmented production processes, diverse material usage, and varying technological standards that complicate environmental regulation.

Recent research examining panel data from China’s provincial construction sectors reveals how carbon trading policies are reshaping industry practices. The construction industry’s distinctive characteristics—including project-based operations, temporary workforce structures, and decentralized decision-making—create both obstacles and opportunities for environmental improvement. Understanding how carbon markets influence green total factor productivity (GTFP) in this context provides crucial insights for policymakers and industry stakeholders worldwide.

Measuring Green Productivity in Construction

Evaluating environmental performance in construction requires sophisticated measurement approaches that account for both economic output and ecological impact. The Super-Slack Based Measure (Super-SBM) model combined with the Global Malmquist-Luenberger (GML) index offers a comprehensive framework for assessing GTFP in this complex industry.

Traditional radial Data Envelopment Analysis (DEA) methods often fall short in construction contexts because they assume proportional adjustments across all inputs and outputs. The construction industry’s reality involves multiple inefficiencies that don’t follow proportional patterns—excess material waste, underutilized equipment, and variable labor productivity. The Super-SBM model addresses these limitations by incorporating slack variables that capture specific areas of inefficiency, providing a more accurate picture of performance gaps.

When applied to construction, this methodology considers three critical inputs: labor, capital, and energy consumption, while accounting for undesirable outputs like carbon emissions and construction waste. The GML index then tracks productivity changes over time, distinguishing between improvements from better technology (green technological change) and enhancements in operational efficiency (green technical efficiency).

Carbon Trading’s Impact Mechanism

Carbon trading systems create financial incentives for construction companies to reduce their environmental footprint through several interconnected pathways:

• Cost internalization – Carbon emissions become a measurable cost rather than an externality
• Innovation stimulation – Financial pressure drives development and adoption of green technologies
• Operational optimization – Companies streamline processes to minimize carbon-intensive activities
• Supply chain coordination – Builders collaborate with material suppliers and subcontractors to reduce embodied carbon

The research employs Difference-in-Differences (DID) methodology to isolate the causal effect of carbon trading policies, comparing regions with and without carbon markets before and after implementation. This quasi-experimental approach helps distinguish policy impacts from other economic and technological trends affecting the construction sector.

Overcoming Methodological Challenges

Studying carbon trading effects in construction presents unique methodological challenges. The industry’s regional variations, project-based nature, and data limitations require careful research design. The approach incorporates several robustness checks including:

• Placebo tests to verify that observed effects are genuine policy impacts
• Propensity score matching to create comparable treatment and control groups
• Instrumental variable approaches using PM2.5 concentrations to address endogeneity concerns
• System Generalized Method of Moments (SYS-GMM) to account for dynamic relationships and lagged effects

These methodological safeguards ensure that the identified relationships between carbon trading and productivity improvements reflect genuine causal mechanisms rather than spurious correlations.

Heterogeneous Impacts Across Regions and Company Types

The research reveals significant variation in how carbon trading affects different segments of the construction industry. Developed coastal regions show stronger responsiveness to carbon markets, likely due to better monitoring infrastructure and greater regulatory compliance capacity. Large construction enterprises demonstrate more substantial GTFP improvements compared to small and medium contractors, suggesting scale advantages in adopting green technologies., as as previously reported

The study also identifies threshold effects in green technology innovation—beyond certain levels of technological capability, construction firms experience accelerating returns from carbon trading participation. This nonlinear relationship highlights the importance of building foundational technical capacity before expecting dramatic environmental performance improvements.

Policy Implications and Future Directions

The findings suggest several strategic considerations for enhancing carbon trading effectiveness in construction:

• Tailored compliance mechanisms accounting for company size and technical capacity
• Gradual policy intensification to allow adaptation and capacity building
• Technical assistance programs supporting smaller contractors in emissions monitoring and reduction
• Integrated policy packages combining carbon trading with green building standards and material efficiency requirements

As global attention on construction emissions intensifies, China’s experience with carbon trading provides valuable lessons for other developing economies facing similar sustainability challenges. The construction industry’s transition to greener practices represents not just an environmental imperative but an economic opportunity—driving innovation, creating skilled jobs, and building competitive advantage in the growing green building market.

The research methodology and findings offer a robust framework for continued monitoring of construction’s environmental performance, supporting evidence-based policy refinement and industry guidance. As carbon markets evolve and expand, their role in shaping construction practices will likely grow, making ongoing evaluation essential for maximizing their positive impact.

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