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Assessment of Economic Impact of Emission Trading Schemes in China—Based on
a Single Country CGE Model
Abstract: China's carbon emissions trading market has entered the pre-launch "sprint" stage, is
trying to achieve the carbon trading transition from the pilot to a unified national carbon market. In
this paper, scenarios are set strictly according to institutional elements of the national carbon market,
by setting up the carbon emission trading module, the modified computable general equilibrium
model is established to simulate its impacts on economy and environment of China, and analyze
interactions between industries deeply. Results show that emission reduction effect of the national
carbon market is effective, and its negative economic impact is limited.
Key words: China carbon trading market; CGE model; economic and environmental impact
1. Introduction
Climate change has been a challenge for all human beings of contemporary society. In 2015, China
announced its enhanced actions and measures on climate change in a document entitled Enhanced
Actions on Climate Change, which proposed a number of voluntary goals: carbon dioxide emissions
would peak in 2030; carbon dioxide emissions per unit of GDP would decline by 60–65% compared
with the level of 2005. China is attempting to establish ETS step by step to explore a new mode of
low-carbon development.
To achieve these goals, China announced to launch seven Pilot ETSs in two provinces (Hubei and
Guangdong) and five cities (Beijing, Shanghai, Shenzhen, Tianjin and Chongqing) in 2011 [1].
Since then ,China is going to implement a nationwide ETS in 2017 based on the Pilot ETSs,
implying that the performance of those Pilot ETSs will to a large extent determine the future of ETS
in China [2]. It is necessary to make a quantitative estimation for nationwide ETS, especially their
economic and environmental effects, which will provide a basis for scientific decisions on
establishing a nationwide ETS.
2. Literature review
As carbon emission has a close relationship with economic activities, carbon ETS will result in
various socio-economic and environmental effects. Studies investigating the carbon ETS’s
economic and environmental impacts can be divided into three types: comparison between carbon
ETS and carbon tax, evaluation of various carbon ETS mechanisms, and assessment of effects of
carbon ETS on economy and emission reduction.
There are many studies exploring the impact of different carbon tax schemes by using CGE models
for different economies [3], [4], [5], [6] and [7]. A number of studies have applied CGE model to
assess carbon ETS and carbon tax, and have compared the economic and environmental impacts of
these two policies. Abrell [8] analyzed the application of market-based emission regulation
instruments to address the carbon dioxide emissions of transportation in European Union. He found
that including transportation into the EU ETS was superior to a tax-based approach. Wang et al. [9]
compared three different polices: renewable energy policy, carbon ETS and carbon tax, and their
results showed that economic impacts and emission reduction effects of these policies had both
advantages and disadvantages. Some researchers emphasized cost-saving effects of carbon ETS. By
using a dynamic multi-regional CGE model, Fujimor et al. [10] found that the net global welfare
losses in scenarios without emission trading ranged between 0.7% and 1.9%, whereas emission
trading reduced the losses by 0.1–0.5%.
Another focus of research is using CGE model to evaluate the effect of a variety of mechanisms in
carbon ETS, whose key mechanism is allowance allocation. Bӧhringer and Lange [11] showed that
the objectives of economic efficiency and free allocation of allowances were incompatible with
harmonized allocation rules. Therefore, they proposed to relax either the efficiency objective or the
objective of free allowance allocation. Babiker et al. [12] pointed out that international carbon
trading market was not always beneficial and it could decrease the national welfare; the reason was
similar to “immiserizing” growth. Roman and Welsch [13] found that carbon trading market link
between Russia and the European Union, besides being beneficial for the EU countries, implied a
significant rise in Russia’s GDP and welfare, along with a considerable decline in Russia’s output.
Cui et al. [22] found that carbon trading market link among seven pilots and national carbon trading
market could reduce the total abatement cost by 4.5% and 23.67% respectively. Tang et al. [14]
explored the impacts of carbon price on China’s macroeconomics, environmental quality, and
energy demand respectively and suggested that the alternative interval of carbon price benchmark
in the nationwide ETS with a lower bound of 30 Yuan per ton to an upper bound of 50 Yuan per
ton.
With the establishment of carbon ETS around the world, numerous studies have estimated the
influence of those ETS for local regions or countries. EU ETS is the most influential and largest
carbon market, and its influences are estimated constantly. Klepper and Peterson [15] simulated the
economic impacts of EU ETS and found a 0.3% decline in output compared with Business-as-usual
case and industrial sectors suffered more dramatic declines. Wagner et al. [16] examined the impact
of EU ETS by using comprehensive firm and plant level data for more than 4500 French
manufacturing firms. They found that the EU ETS-regulated manufacturing plants can reduce
emissions by an average of 15–20%, which is a significant amount. Martin et al. [17] evaluated the
economic impact of the EU ETS and found that the EU ETS had a positive impact on the scale of
treated firms, where it had a negative impact on scale-free aspects of economic performance. After
seven carbon Pilot ETSs were launched in China, some studies have assessed economic and
environmental impacts of these Pilot ETSs. Cheng et al. [18] assessed effects of Guangdong Pilot
ETS under different scenarios and noted that Guangdong Pilot ETS had the co-benefits of reducing
SO2 and NOx emissions by 12.4% and 11.7% in 2020 compared with the Business-as-usual scenario.
All of these studies analyze carbon ETS in different regions at different scales, however, current
research in this field still have some gaps. Some studies lack of clear coverage of industries, which
is likely to overestimate economic and environmental influences of carbon ETS. Most of the studies
fail to take different number of free allowances among industries into consideration, resulting in
inaccurate estimation of ETS’s influence and insufficient analysis of the interactions between
industries. In view of these limitations, this research establishes hypothetical scenarios according to
institutional factors of nationwide ETS, clears the coverage rate of industries and calculates number
of free allowances in different industries so as to obtain precise evaluation of economic and
environmental influences and deepen analysis of interaction between sectors.