Firm Heterogeneity and Its Implication on Chinese Climate Policies - A CGE Analysis based on China’s National IO Table with Firm Heterogeneity Information

China is pushing ahead its GHG mitigation. The policy regulations were limited to selected emitters –mainly state owned firms and large scale private firms, in order to lower the monitoring and administration costs, as well as market risks. Meanwhile, preferential financial supports are provided to regulated firms for “Green” investment, intended to regain their market competitiveness. However, along with the growth in private sectors and the tightening of emission target in China, the double distortion caused by limited regulation coverage and unbalanced financial support may cause potential risk for climate policy effectiveness, market stability and long-term economic growth. The distortion can potentially undermine the economic efficiency of climate policy regulation, due to unbalanced marginal abatement cost (MAC) of carbon and marginal cost for green investments. And the efficiency loss is intensified due to significant carbon leakage within sectors. We identify heterogeneous firms and separate them in an IO table with firm-level survey data, and specify their behaviors in a dynamic CGE model. The effects of alternative climate policy designs w.r.t. regulation coverage and financial support are simulated systematically in the context of China. The simulation indicated that with the unbalanced regulation structure on going, the effectiveness and economic efficiency of climate policies is significantly undermined. Expanding the policy coverage has the first-order effect in improving economic efficiency of emission reduction efforts. On the other hand, over invest in energy technologies in a limited part of the firms may decrease the total efficiency of investments and dampens long-term economic growth by competing with fixed-capital investment for financial resources. A market oriented arrangement of emission reduction burden sharing and green investment allocation mechanism is crucial for China to achieve a more ambitious emission target in the long-run.