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China's Rate-Based Approach to Reducing CO2 Emissions: Attractions, Limitations, and Alternatives

Author

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  • Lawrence H. Goulder
  • Richard D. Morgenstern

Abstract

A distinguishing feature of China's recently launched emissions trading system (ETS) is its rate-based structure. This structure governs the way emissions allowances are allocated and the conditions for compliance, and it has important implications for system performance. We show that the rate-based structure implies a wedge between the marginal costs of emissions abatement as perceived by firms and society's marginal costs of abatement. Moving to a mass-based system would eliminate this wedge and thereby yield significant gains in terms of cost-effectiveness and efficiency (aggregate net benefits). We indicate that these gains could be realized while addressing concerns about distributional equity.

Suggested Citation

  • Lawrence H. Goulder & Richard D. Morgenstern, 2018. "China's Rate-Based Approach to Reducing CO2 Emissions: Attractions, Limitations, and Alternatives," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 458-462, May.
    • Handle: RePEc:aea:apandp:v:108:y:2018:p:458-62
    Note: DOI: 10.1257/pandp.20181028
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    Citations

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    Cited by:

    1. Wang, Banban & Pizer, William A. & Munnings, Clayton, 2022. "Price limits in a tradable performance standard," Journal of Environmental Economics and Management, Elsevier, vol. 116(C).
    2. Jin, Yana & Liu, Xiaorui & Chen, Xiang & Dai, Hancheng, 2020. "Allowance allocation matters in China's carbon emissions trading system," Energy Economics, Elsevier, vol. 92(C).
    3. Stavins, Robert N., 2019. "The Future of U.S. Carbon-Pricing Policy: Normative Assessment and Positive Prognosis," Working Paper Series rwp19-017, Harvard University, John F. Kennedy School of Government.
    4. Yu, Zhongjue & Geng, Yong & Calzadilla, Alvaro & Bleischwitz, Raimund, 2022. "China's unconventional carbon emissions trading market: The impact of a rate-based cap in the power generation sector," Energy, Elsevier, vol. 255(C).
    5. Stavins, Robert, 2019. "The Future of United States Carbon-Pricing Policy," RFF Working Paper Series 19-11, Resources for the Future.
    6. Robert N. Stavins, 2020. "The Future of US Carbon-Pricing Policy," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 1(1), pages 8-64.
    7. Yeh, Sonia & Burtraw, Dallas & Sterner, Thomas & Greene, David, 2021. "Tradable performance standards in the transportation sector," Energy Economics, Elsevier, vol. 102(C).

    More about this item

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • P28 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Natural Resources; Environment
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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