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Towards a national ETS in China: Cap-setting and model mechanisms

Author

Listed:
  • Feng, Shenghao
  • Howes, Stephen
  • Liu, Yu
  • Zhang, Keyu
  • Yang, Jun

Abstract

China is moving from regional Emissions Trading Schemes (ETSs) to a nation-wide ETS. Although a larger ETS will be more efficient, the literature warns that it could make net permit selling regions worse off. We use a CGE model to simulate the linking of two provincial ETSs, namely those of Hubei and Guangdong. Our simulations suggest a trade-off between efficiency and equity as the richer regions (typified by Guangdong) will benefit from linking but the poorer regions (typified by Hubei) may lose. This is because poorer provinces in China tend to be more emissions intensive and therefore likely to face a carbon price rise upon linking, the costs of which may be only partially offset by trading, if indeed trading is permitted. We show this, and explain why it is the case by improving on the stylized model suggested by Adams and Parmenter (2013). Following Atkinson (1970), we find that worsened equity from linking may dominate improved efficiency, thus reducing aggregated welfare. We advise more generous caps to be given to more emissions intensive and less developed regions. If so, as suggest our simulation results, a Pareto-improvement could be attainable.

Suggested Citation

  • Feng, Shenghao & Howes, Stephen & Liu, Yu & Zhang, Keyu & Yang, Jun, 2018. "Towards a national ETS in China: Cap-setting and model mechanisms," Energy Economics, Elsevier, vol. 73(C), pages 43-52.
    • Handle: RePEc:eee:eneeco:v:73:y:2018:i:c:p:43-52
    DOI: 10.1016/j.eneco.2018.03.016
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    Citations

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    Cited by:

    1. Zhang, Hongyu & Zhang, Da & Zhang, Xiliang, 2023. "The role of output-based emission trading system in the decarbonization of China's power sector," Renewable and Sustainable Energy Reviews, Elsevier, vol. 173(C).
    2. Qi, Shaozhou & Cheng, Shihan & Tan, Xiujie & Feng, Shenghao & Zhou, Qi, 2022. "Predicting China's carbon price based on a multi-scale integrated model," Applied Energy, Elsevier, vol. 324(C).
    3. Glyn Wittwer, 2022. "Preparing a multi-country, sub-national CGE model: EuroTERM including Ukraine," Centre of Policy Studies/IMPACT Centre Working Papers g-334, Victoria University, Centre of Policy Studies/IMPACT Centre.
    4. Siriwardana, Mahinda & Nong, Duy, 2021. "Nationally Determined Contributions (NDCs) to decarbonise the world: A transitional impact evaluation," Energy Economics, Elsevier, vol. 97(C).
    5. Wu, Huihuang & Zhou, Yuhan & Wang, Xian & Hu, Xiurong & Zhang, Shihui & Ren, Yang & Liu, Junfeng & Liu, Ying & Tao, Shu, 2024. "The climate, health, and economic outcomes across different carbon pricing policies to achieve China's climate goals," Applied Energy, Elsevier, vol. 368(C).
    6. Cui, Qi & Liu, Yu & Ali, Tariq & Gao, Ji & Chen, Hao, 2020. "Economic and climate impacts of reducing China's renewable electricity curtailment: A comparison between CGE models with alternative nesting structures of electricity," Energy Economics, Elsevier, vol. 91(C).
    7. Chu, Baoju & Dong, Yizhe & Liu, Yaorong & Ma, Diandian & Wang, Tianju, 2024. "Does China's emission trading scheme affect corporate financial performance: Evidence from a quasi-natural experiment," Economic Modelling, Elsevier, vol. 132(C).
    8. Cui, Qi & He, Ling & Liu, Yu & Zheng, Yanting & Wei, Wei & Yang, Bo & Zhou, Meifang, 2021. "The impacts of COVID-19 pandemic on China’s transport sectors based on the CGE model coupled with a decomposition analysis approach," Transport Policy, Elsevier, vol. 103(C), pages 103-115.

    More about this item

    Keywords

    ETS; Cap-setting; Equity; Welfare; China; CGE;
    All these keywords.

    JEL classification:

    • 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
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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