The purpose of the paper is to provide a clear mechanism for determining carbonemissionspricing in China as a guide to how carbonemissions might be mitigated to reduce fossil fuel pollution. The Chinese Government has promoted the development of clean energy, including hydroelectric power, wind power, and solar energy generation. In order to involve companies in carbonemissions control, a series of regional and provincial carbon markets have been established since 2013. Since China’s carbon market was established in 2013 and mainly run domestically, and not necessarily using market principles, there has been almost no research on China’s carbon price and volatility. This paper provides an introduction to China’s regional and provincial carbon markets, proposes how to establish a national market for pricingcarbonemissions, discusses how and when these markets might be established, how they might perform, and the subsequent prices for China’s regional and national carbon markets. Power generation in manufacturing consumes more than other industries, with more than 40% of total coal consumption. Apart from manufacturing, the northern China heating system also relies on fossil fuels, mainly coal, which causes serious pollution. In order to understand the regional markets well, it is necessary to analyze the energy structure in these regions. Coal is the primary energy source in China, so that provinces that rely heavily on coal receive a greater number of carbonemissions permits from the Chinese Government. In order to establish a national carbon market for China, a detailed analysis of eight important regional markets will be presented. The four largest energy markets, namely Guangdong, Shanghai, Shenzhen and Hubei, traded around 82% of the total volume and 85% of the total value of the seven markets in 2017, as the industry structure of the western area is different from that of the eastern area. The China National Development and Reform Commission has proposed a national carbon market, which can attract investors and companies to participate in carbonemissions trading. This important issue will be investigated in the paper.
like Guangdong. Based on the number of enterprises covered, Beijing and Tianjin achieved the compliance rate of 97.1% and 96.5%, with twelve and four enterprises failing to compliance with their emissions caps, respectively (Tanpeifang, 2014c; TMDRC, 2014). The relatively low rate of compliance in Beijing is mainly because it faced very complicated conditions. The Beijing pilot not only covers a large number of entities, but also these entities covered are very broad in scope, ranging from large centrally own enterprises like Sinopec, multilateral corporations like Microsoft, universities like Peking University, hospitals, medias like CCTV and Xinhua News Agency, and other public service units like ministries (Zhang and Li, 2014a,b). The lowest rate of compliance in Tianjin of the five pilots subject to compliance obligations for 2013 might be associated with the fact that, unlike Shanghai and Guangdong pilots, the enterprises covered by the Tianjin pilot would not be required to pay the penalty if they failed to comply with their emissions obligations. They would only suffer from not getting preferential financing services, not being on the priority list of applying for national recycling economy projects, enjoying supportive national policies on energy conservation and emission reduction, and receiving budgetary investment projects within three years (TMG, 2013a). Overall, while these five pilots have experienced the ups and downs, their good start and performance in the first compliance year provide encouraging sign for the compliance of all the seven pilot schemes in the next year and beyond.
In contrast to a monopoly market, stronger climate concerns in a competitive market reduce not only the product carbon footprint, but also each firm’s corporate carbon footprint. As a result, industry emissions are lower when consumers have stronger climate concerns. The reason for this is that offering a product with a lower carbon footprint does not create a market expansion effect when category demand is fixed. Interestingly, Proposition 10 further implies that, if the offset technology is sufficiently cost effective, competitive forces can create a win-win-win outcome for each firm, climate, and society. Therefore, choosing an offset strategy is consistent with pursuing corporate social responsibility. This has an important implication for policy makers: Providing efficient carbon removal technologies can accelerate the transition to a zero-carbon economy by providing incentives for firms to offer products and services with a net-zero product carbon footprint.
CGE models have been used over the last decade to establish the economic and envi- ronmental effectiveness of adopting different BAMs such as export rebates, carbon or ‘green’ tariffs, production rebates and forcing importers to surrender carbon allowances in a cap-and-trade system. Mckibbin and Wilcoxen ( 2009 ) used the G-Cubed model to examine how large green tariffs (i.e., import border adjustments) would need to be to offset the costs of adopting climate policies and whether the tariffs are effective in combating competitive disadvantage and reducing carbon leakage. Their study focussed on the USA and Europe under various climate policy scenarios. They found that the effects of such tariffs would be small in protecting the domestic import competing sec- tor and would reduce leakage very modestly. Bernard and Vielle ( 2009 ), in analyzing the EU emissions trading system (ETS), found that carbon leakage may affect some specific sectors while the aggregate impact would be rather small. Kuik and Hofkes ( 2010 ) also explored some implications of BAMs in the EU ETS and concluded that some sectors may benefit, but from and environmental point of view, BAMs are not a very effective measure.
As a first result, we find that, in the absence of commitment, the government sets a lower level of carbon price relative to the commitment benchmark and the firm underin- vests in the clean technology. This is because, when investment is made, and, therefore, emission abatement achieved, carbonpricing only triggers emissions reduction through consumption cuts. Therefore it has a lower benefit than under commitment when the firm also responds to higher price by increasing its abatement effort. Further, the larger the investment, and, therefore, the larger its decarbonization benefit, the lower the optimal price, as the government can afford to lower the burden on consumers. On the other hand, the firm takes into account that investment is going to put downward pressure on carbon price levels, therefore reducing the profitability of abatement, such that - in response to such expropriation risk - it withholds investment relative to the commitment benchmark. We then show that, by complementing carbonpricing with carbon contracts for differ- ences, a welfare-improving price-investment equilibrium can be achieved. On one hand, low-carbon investment by the firm is now remunerated through the contracts, so, provided the strike price is not too low, the firm chooses a higher level of investment relative to the case with no contracts. In addition, the level of investment approaches the commitment benchmark level when the strike price approaches the commitment benchmark carbon price level. As for the equilibrium choice of carbon price by the goverment, this is also higher than in the case without contracts, provided the strike price is large enough. Inter- estingly, the equilibrium carbon price under the contracts is non-monotonic in the strike price. This is because an increase in the strike price has two opposite effects on carbonpricing. On the one hand, it increases investment and, thus, decarbonization benefits, which, as in the case without contracts, puts downward pressure on the optimal carbon price (even though at a lower rate than before). On the other hand, it increases the cost of remunerating investment through the contracts, which puts upward pressure on the optimal carbon price, as the government wants to reduce the payment due to the firm. While for low enough levels of the strike price, the negative “investment effect”outweighs
What price should a policy maker put on emissions of greenhouse gases such as CO 2 in order to internalize climate change? In this paper, I address this question while taking into account that climate change policy is set by gov- ernments that resort to income taxation to finance public goods. Specifically, I show how the optimal carbon price is affected when adding two real-world features, distortionary income taxation and the inability of the government to commit to future policies, to an otherwise standard climate-economy model. Qualitatively, I find that the interaction between taxing income and pricing polluting production inputs that was previously established in a static frame- work (Bovenberg and Goulder, 1996) generalizes in an intuitive way to a dy- namic setting with persistent environmental damages such as climate change. In more detail, compared to a setting with lump-sum taxes, emitting carbon is linked to additional effects – positive or negative – on welfare under distor- tionary income taxation. These “second-best” benefits or costs are caused by the emission level affecting the households’ labor supply and savings decisions, which are distorted by the income tax. As a consequence, the optimal carbon price – which must equal the marginal social cost of carbon (SCC) in order to fully internalize climate change – is in general not at the level of marginal climate change impacts on welfare caused by the emission of an additional unit of carbon (MCD). This deviation of the optimal carbon fee from its Pigouvian level is referred to as the “tax-interaction effect”.
–0.8 6.4 –5.2 –17.1 –22.3 –18.0%
–1.0 5.9 –6.5 –21.4 –27.9 –22.5%
Source: See Advani et al. (2013), Table 6.6.
From an economic efficiency perspective these changes would provide more consistent signals to households to reduce energy use and carbonemissions. Of course the biggest constraint on their implementation is the distributional effect. Their first-order impact (ignoring any behavioural response) would be highly regressive, increasing the cost of living by around 4% for households in the poorest expenditure decile but by less than 1% for those in the richest decile. However, as demonstrated in the modelling work by Advani et al. (2013) and other recent evidence from Preston et al. (2013), it would be possible to use some of the revenues generated from the tax reforms to design a compensation package which leaves households in the bottom third of the income and expenditure distributions better off on average, and leaving relatively few net losers at the bottom of each distribution. Figures 8.1 and 8.2, taken from Advani et al. (2013), show the combined distributional impact of the pricing reforms and a package of compensatory increases in a range of means-tested benefits. 70 In each figure the top panel shows the distributional effect measured against household income (after housing costs) and the bottom panel the effect measured against non-housing expenditures. Figure 8.1 shows the average effect as a proportion of total income or spending across deciles, and Figure 8.2 the proportion of net winners and losers from the reforms within decile.
In the Paris Agreement, all countries committed to transitioning towards low-carbon, climate- resilient economies. Several policy instruments have been proposed to finance this transition, including green bonds and carbonpricing. Often these instruments are perceived as alternative choices, but this paper finds there are important gains from deploying them jointly, provided countries have sufficient fiscal space. Debt levels are rising in many low-income countries (Essl et al. 2019), and in such circumstances it is preferable for climate policy to be financed by taxation or budget reallocation instead of deficit spending (Forni et al. 2019). However, for advanced econo- mies, Blanchard (2019) observes that sovereign debt is, in contrast to corporate debt, not rising that much, so there may be space for pursuing climate policies by green bonds and carbonpricing. Carbonpricing improves the performance of green bonds, which in turn improve inter-genera- tional equity, political feasibility, and help address multiple market failures. Yet, not all carbonpricing is the same: the synergies with green bonds are greater for carbon taxation than for emissions trading.
and middle regions following the economic reform of 1978. To achieve more balanced regional development, the central government of China began to implement a so‐called “Western Development” program after 2000. The development of middle region has also been a focus for policymakers since 2004. Many energy‐intensive firms formerly located in the east region have been moved to the west and middle regions since then, while the east region has increasingly increased its composition of service and high‐tech firms. Thus, it is not surprising that the average inefficiency seen in the west and middle regions has increased more rapidly than that of the east region. In essence, what Figure 3 highlights is the evolving composition of China’s industry with the displacement of heavy industry to the Western region.
on: 1) the maximum feasible CO 2 price itself; 2) the maximum tolerable increase in final energy
prices; 3) a maximum tolerable decline in energy consumer surplus; and 4) a maximum decline
in fossil energy producer surplus. Under each political constraint, we identify the CO 2 price,
subsidy for clean energy production, and lump-sum transfers to energy consumers or fossil energy producers that maximizes total welfare, subject to constraints, and explore parametric sensitivities. To our knowledge this paper is the first to employ a net-benefits framework to explore the im- pact of multiple political economy constraints on the design of climate mitigation policy. This work builds on previous literature that considers the distributional impacts of policy as an essential component of instrument choice. Burtraw et al. (2002) explore the impact of different allowance allocation schemes under emissions trading programs in the electricity sector on the asset value of existing generators, while Bovenberg et al. (2005) employ a stylized general equilibrium model to explore the efficiency costs of environmental policies that are designed to fully offset distributional impacts on pollution-related industries. Boyce and Riddle (2007) and Boyce and Riddle (2010) ex- plore the distributional impact of carbonpricing on U.S. households and identify revenue recycling strategies that produce net private benefits for all but the highest income deciles. Finally, Hirth and Ueckerdt (2013) employ a partial equilibrium model of the Northwestern European electricity sec- tor to calculate the distributional effects of renewable energy support and carbonpricing policies, arguing that a mix of these policies may be preferable if policy makers wish to avoid large transfers of wealth, even if carbonpricing is preferable from an efficiency perspective.
an Armington elasticity. If the two goods are very similar, such as steel from the U.S. or China, then the Armington elasticity is high. 14
An additional aspect of international trade is that CIM-EARTH includes detail on transportation costs for various means of shipping between regions. The transport industry uses energy, of course, and so the transport cost is affected by a tax on energy. In particular, each final imported good is modeled as a Leontief nest of the traded commodity and a sub-nest of requisite transport costs from air, water, and other transport services. Importers purchase transport services from global homogenous transport industries, which aggregate transport services from the respective regions. The nesting of transport options is assumed to have little flexibility ( σ = 0.2), since predominant trade routes are fixed by geography and allow little room for substitutions such as between land and water routes. This modeling generally precludes development of new water routes left open by receding summer ice, or new overland routes (for example from new pipeline construction).
increased share of imports from China, characterized by lower energy efficiency than European countries.
Geographical structure of imports changed drastically for 10 years (see Figure 6). In 2000 China represented only 10% of emissions embodied in Russian imports; in 2011 it was already 39%. Six leading Asia-Pacific countries (China, India, Indonesia, Japan, South Korea, and Taiwan) represent now more than a half of emissions embodied in Russian imports, while the share of the USA and the EU (previously dominating Russian import structure) has decreased. In general, structure of emissions embodied in imports reflects current structure of production- based emissions on the whole world with some corrections determined by the geographical proximity of Russia to Asia-Pacific.
The second reason is that the firm and the government take sequential moves, and low-carbon investments are irreversible and specific in nature. The two arguments lead to an ex-post opportunism problem: the former creates motivation for ex-post opportunism, while the latter creates the scope. The government has an incentive to create expecta- tions of a relatively high carbon price (e.g., announce the emission of a small number of permits or of a high carbon tax) in order to induce the firm to invest in radical green innovation (hence achieving the goal of reducing emissions); then, after the firm has sunk the investment costs, the government has an incentive to ex-post lower the carbon price in order to avoid the negative impact on consumer surplus. However, as rational agents, potential innovators anticipate the risk of such ex-post opportunistic behavior on the side of the government, and do not invest in the first place, so that no emission reduction is realized.
Simply adjusting the cap downwards or eliminating al- lowances can enhance environmental stringency. Our characterisation of the old paradigm deliberately emphasises a number of challenges emerging from real- world experience with ETSs, which are not adequately addressed by the textbook theory of emissions trading. Driven by new scientiﬁ c insights, the old paradigm has experienced a substantial transformation in recent years. Modern environmental economics has developed a rich and nuanced body of knowledge surrounding effective carbonpricing. However, this is sometimes ignored in the policy debate. Therefore, it is important to show how new approaches can deal with the challenges in order to reap the full potential of ETSs.
enterprise profits and reduce foreign capital inflows; the causal effect is greater in countries with lower levels of environmental regulation.
It can be seen from the literature that the existing research focuses more on the effect and experience of developed countries in the governance of the environment, especially on EU ETS (Jiang and NovákM, 2004; Gagelmann and Frondel, 2005; Grubb et al., 2005; Hoffmann, 2007) [28-31]. However, due to the large differences between developed countries and developing countries in terms of economic development degree and social systems, the analysis of environmental regulations in developed countries cannot provide a practical reference for developing countries, which is one of the existing research defects and deficiencies. Second, in terms of the CLCP policy proposed by the Chinese government, the current research on this policy is only limited to the analysis of its environmental benefits but ignores its economic benefits. Such a one-sided policy assessment is not conducive to the government's comprehensive understanding of the overall effect of CLCP and is bound to affect the promotion of CLCP nationwide and to further affect the process of China's emissions reduction. Moreover, most of the studies on the economic benefits of environmental regulation are based on the perspectives of the performance, productivity and innovation of microenterprises (Stavins, 2007; Tomás et al., 2010; Anderson et al., 2011) [32-34]. These studies ignore the impact of the migration effect of the changes in enterprise behaviors on regional economic growth. This disregard is undesirable. In addition, due to the different research methods and objectives, each study adopts different indicators to measure environmental regulation (Ederington and Minier, 2003) , and the conclusions obtained are quite different. Furthermore, the existing research is only a discussion and analysis of correlation, and the existence of endogenous problems makes the causal relationship between environmental regulation and economic growth to not be fully demonstrated.
of emissions from the atmosphere from e.g. biomass and CCS (BECCS) or afforestation. The dashed iso-revenue curves indicate all points that correspond to revenues of US$ 100 bn, 500 bn, and 1 trn, respectively.
Besides differences between models, different stabilization targets as well as restricted availability of certain technologies influence the carbon price. That is, a less ambitious mitigation target will result in a lower carbon price, whereas foregoing the use of CCS, or restricting biomass use, will raise it. In order to get a better understanding for the determinants of carbon prices, we perform a simple regression analysis, in which the year 2020 carbon price in a stabilization scenario (for 450ppm and 550ppm, and with full technological availability, limited biomass, as well as without CCS) is the dependent variable. We regress these prices on dummy variables for the stabilization target (with 550ppm as the lower-bound benchmark), technological availability (with full-tech as the benchmark) and a model-specific dummy variable (which gives the ceteris paribus difference to the average) using OLS. As the results reported in Table 2 should not be regarded as a draw from a random sample, standard errors and significance levels are uninformative; rather, the results should be interpreted as conditional means.
A major challenge for investors in interpreting the climate policy framework emerges from the Clean Development Mechanism (CDM). Installations covered by the EU ETS can use CDM credits, called Certificates of Emission Reductions (CER), to cover a share of their verified emissions. Under existing rules, the use of CERs could allow emissions from EU ETS installations to exceed the current cap by an average of 5.4% in the period 2008-2012. How much of this potential is ultimately used is uncertain, as is the affect that using CERs will have on the ultimate price of EU ETS Allowances. Currently, CERs trade at a 25% discount to ETS allowances. One interpretation of the discount is that the market expects that there will be more CERs available than can be absorbed under current market rules and that CERs have been bid down in price as a result. However, there are other possible reasons for this discount, and uncertainty generated by the relationship between CER and ETS markets increases the difficulty in basing investment decisions on the ETS price.
life disposal of SGGs, which is when a significant part of the emissions either occur or can be avoided. Thus in a sense, it was charging consumers for emissions that may not fully occur. 15
The SGG carbon levy was in place for only about 18 months, so there has been insufficient time to gather data and assess policy effectiveness in a comprehensive and robust way. Nevertheless, interviewees from industry, NGOs, and government have reported several anecdotal impacts of the policy. First, it was clear that a perverse incentive was created at the start of the scheme for importers to stockpile massive amounts of refrigerants just before the scheme came into effect, in order to avoid the liability. These refrigerants reportedly were sold once the scheme had started with the carbon levy included in the price, leading to a loss of revenue for government and a windfall profit for the importers. Therefore, as with any policy, one needs to think through and react to possible perverse incentives that are created.
Hypothesis 1(H1): The CLCP policy implementation promotes local economic growth at
the macrolevel, and the promotion effect can be gradually strengthened with time.
Although the CLCP policy can promote economic growth at the macro-regional level, its most direct impact is on micro enterprises, whose original living environment could be changed. As the CLCP policy sets out new requirements on the carbonemissions of enterprises, enterprises need to adjust existing products, production processes and pollution emissions to meet them. However, no matter which path the enterprise chooses, undoubtedly, the production costs will increase, which will force the enterprise to make new choices. When enterprises are faced with changes in external environment constraints, they are either forced to stop and exit from the market by local governments for failing to reduce environmental pollution in the production process or carry out technological innovation through R&D investment. As the preferred development strategy of enterprises, innovation in clean technology alleviates the pressure of environmental regulation on enterprises and overcomes the negative impact of the external cost increase to realize the “Porter Hypothesis”. In addition to technical innovation, enterprises also conduct management reform of the internal production process to attempt to improve the production efficiency by strengthening management to increase the output per unit input and to offset the cost increase of environmental regulation, and thus promoting economic growth. Of course, enterprises can also choose to transfer across regions or exit from the market to completely avoid the impact of environmental regulation on enterprises. However, the existence of transfer costs forces the enterprise not to exit from the market but to compensate for cost increase and to improve enterprise income by strengthening the internal management, improving operating efficiency and carrying out innovation. Therefore, based on the above analysis, we propose the second hypothesis, which is as follows: