The Economic Impact of Linking the Pilot Carbon Markets between Hubei and Guangdong Provinces: A Bottom-up CGE Analysis

Controlling greenhouse gas emission is an important task for China to actively address global climate change. In order to achieve the 2015 target of 17% reduction in carbon intensity against 2010 levels, China has adopted a series of market-based policy measures. This paper utilizes SICGE-R-CO2 (The multiregional General Equilibrium model with carbon dioxide emission rights trading module developed by State Information Center) to simulate the mitigation costs and economic influences of Guangdong’s and Hubei’s independent mitigation efforts and linking cross-provincial carbon trading. It is found out that linking carbon trading market can effectively reduce the mitigation cost of the whole region. Carbon price of Guangdong and Hubei stands at 102.9 RMB/tonne of carbon dioxidene of carbon dioxide and 14.8 RMB/tonne of carbon dioxide and the average emissions reduction cost for the region is 972.4 RMB/tonne of carbon dioxide, if the two provinces take actions independently. However, in a linking carbon market where Guangdong buys from Hubei 23 million tons emission permits (824 million RMB), average carbon price will drop to 35.9 RMB/tonne of carbon dioxide and emissions reduction cost 567.9 RMB/tonne of carbon dioxide. From the perspective of industries, output reduction of high emitters is the main drive for emission reduction, while substitution effect between different fuels is limited. In terms of macro economy, carbon tax and carbon market will exert negative impact on economic growth, especially on investment, and consequent price growth is not large. Although the GDP of Hubei (seller of emission right) suffers larger loss, its welfare will be improved. From the perspective of sectors, industries with high emissions like power, non-metallic mineral products, non-metallic mining and dressing, metal smelting and rolling and chemical industries are heavily affected, but service industry is much more immune. In the last part of the paper, major conclusions are drawn and policy proposals are offered.