China’s Unconventional Nationwide CO2 Emissions Trading System: Cost-Effectiveness and Distributional Impacts | Lawrence Goulder, Stanford University
China is implementing what will be the world’s largest CO2 emissions trading system. To reduce emissions, the nation will employ a tradable performance standard (TPS), a rate-based instrument differing significantly from cap and trade (C&T) and a carbon tax, emissions pricing instruments used elsewhere. With matching analytically and numerically solved models, we assess the cost effectiveness and distributional impacts of China’s forthcoming TPS for reducing CO2 emissions from the power sector.
The TPS implicitly subsidizes electricity output; this has significant consequences for cost effectiveness and distribution. The subsidy disadvantages the TPS relative to C&T by causing power plants to make less efficient use of output-reduction to reduce emissions (indeed, it induces some generators to increase output) and by limiting the cost-reducing potential of allowance trading. In our central case simulations, TPS’s overall costs are three times those of C&T. The TPS’s distributional impacts also differ significantly from C&T’s: the share of the overall economic burden borne by producers is much higher.
The use of customized rather than uniform benchmarks (maximal emission-output ratios consistent with compliance) compromises cost-effectiveness but can help serve regional distributional objectives. We examine numerically the aggregate costs of customizing benchmarks in order to reduce the adverse profit impacts in particular regions.
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