Incorporating consumption-based emissions accounting into climate policy in China: Provincial target setting and ETS baseline allocations

An important policy question in China is how to equitably allocate the responsibility for reducing carbon emissions. China has already introduced provincial targets to achieve a national carbon intensity reduction of 17% in its Twelfth Five-Year Plan, and the design of a cap-and-trade system is currently under discussion. Using a computable general equilibrium model with energy system detail, we assess alternative criteria—production emissions, consumption emissions, and a shared production and consumption metric—for allocating the national CO2 intensity target across provinces, and compare them to the existing politicallynegotiated targets. We show how economic cost can be lowered and equity goals addressed by employing a permit trading mechanism and how equity goals can be achieved through the choice of index used to determine the initial allocation. Adjusting the provincial targets on a consumption basis increases the emissions-reduction burden for the eastern provinces by about 60%, while alleviating the burden for the central and western provinces by about 50% each. This adjustment makes meeting policy targets more expensive—the CGE analysis indicates that this adjustment could double China's national welfare loss compared to the homogenous and politically-based distribution of reduction targets. The welfare losses for the eastern provinces increase by a factor of four, while providing little relief for the central and western provinces. A shared-responsibility approach that balances production-based and consumption-based emissions responsibilities alleviates those unbalancing effects and lead to a more equal distribution of economic burden among China's provinces. An emissions-trading system (ETS) that achieves the same reduction and applies various criteria to determine the initial allocation lowers the cost relative to all corresponding intensity target scenarios while still addressing equity concerns. Allocating emissions allowances based on a consumption-based approach results in a greater alleviation of regional welfare impacts and a more equal distribution of economic burden than the regional shared-responsibility scenario. This analysis argues in favor of developing a Chinese ETS and of scaling up efforts to measure, report, and verify emissions, which would in turn allow for a differentiated allocation of allowances similar to that analyzed in this study.