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Energy caps: Alternative climate policy instruments for China?

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  • Karplus, Valerie J.
  • Rausch, Sebastian
  • Zhang, Da

Abstract

Decoupling fossil energy demand from economic growth is crucial for China's sustainable development, especially for addressing severe local air pollution and global climate change. An absolute cap on coal or fossil fuel consumption has been proposed as a means to support the country's energy and climate policy objectives. We evaluate potential energy cap designs that differ in terms of target fuel, point of control, and national versus regional allowance trading using a global numerical general equilibrium model that separately represents 30 provinces in China. First, we simulate a coal cap and find that relative to a cap on all fossil fuels, it is significantly more costly and results in high localized welfare losses. Second, we compare fossil energy cap designs and find that a national cap on downstream fossil energy use with allowance trading across provinces is the most cost effective. Third, we find that a national fossil energy cap with trading is nearly as cost effective as a national CO2 emissions trading system that penalizes energy use based on carbon content. As a fossil energy cap builds on existing institutions in China, it offers a viable intermediate step toward a full-fledged CO2 emissions trading system.

Suggested Citation

  • Karplus, Valerie J. & Rausch, Sebastian & Zhang, Da, 2016. "Energy caps: Alternative climate policy instruments for China?," Energy Economics, Elsevier, vol. 56(C), pages 422-431.
    • Handle: RePEc:eee:eneeco:v:56:y:2016:i:c:p:422-431
    DOI: 10.1016/j.eneco.2016.03.019
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    3. Tol, Richard S.J., 2017. "The structure of the climate debate," Energy Policy, Elsevier, vol. 104(C), pages 431-438.
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    8. Ian Parry & Baoping Shang & Nate Vernon & Philippe Wingender & Tarun Narasimhan, 2020. "Evaluating policies to implement the Paris Agreement: a toolkit with application to China," Chapters, in: Graciela Chichilnisky & Armon Rezai (ed.), Handbook on the Economics of Climate Change, chapter 2, pages 32-67, Edward Elgar Publishing.
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    More about this item

    Keywords

    Climate policy; Energy cap; China; Computable general equilibrium modeling;
    All these keywords.

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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