Working Paper: NBER ID: w31809
Authors: Lawrence H. Goulder; Xianling Long; Chenfei Qu; Da Zhang
Abstract: China’s recently launched CO2 emissions trading system, already the world’s largest, aims to contribute importantly toward global reductions in greenhouse gas emissions. The system, a tradable performance standard (TPS), differs importantly from cap and trade (C&T), the principal emissions trading approach used in other countries. This paper presents the structure and results from a multi-sector, multi-period equilibrium model tailored to evaluate China’s TPS. The model incorporates distinctive features of China’s economy, including state-owned enterprises and electricity market regulation. It distinguishes between the TPS and C&T and considers a wide range of potential future TPS designs.\nKey findings include the following. The TPS’s environmental benefits exceed its costs by a factor of five when only the climate-related benefits are considered and by a significantly higher factor when health benefits from improved air quality are included. The TPS’s interactions with China’s fiscal system substantially affect its costs relative to those of C&T. Employing a single benchmark (standard) for the electricity sector would lower costs by 34 percent relative to the four-benchmark system that is actually in place but increase the standard deviation of percentage income losses across provinces by more than 60 percent. Introducing an auction as a complementary source of allowance supply can lower economy-wide costs by at least 30 percent.
Keywords: CO2 emissions trading; general equilibrium model; China; emissions reduction; environmental policy
JEL Codes: D58; D61; H23; Q52; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TPS implementation (F16) | Environmental benefits (Q52) |
| TPS implementation (F16) | Costs (D23) |
| Single benchmark standard (C29) | Lower costs (D61) |
| Auctioning allowances (D44) | Lower economy-wide costs (D61) |
| TPS interactions with fiscal system (H39) | Costs relative to CT system (P59) |