Abstract
With the worldwide spread of emissions trading schemes (ETSs) and the need for international cooperation on climate change, there is growing interest in linking ETSs. Along with sustainable development, preventing and controlling pollution, is now regarded as an urgent priority by China and Korea. In the context of the willingness of the Chinese and Korean governments to cooperate on ETS, this paper examines the feasibility of a pilot ETS cooperation between Shanghai and Korea from environmental efficiency and CO2 marginal abatement cost (MAC) perspectives. We apply a directional distance function (DDF) and stochastic frontier analysis (SFA) to estimate the environmental efficiency and the CO2 MAC of coal-fueled power plants in Shanghai and Korea using cross-sectional data from 2015. The results indicate that the group frontier environmental efficiency of Shanghai and Korea reached a similarly high score. However, as to meta-frontier environmental efficiency, the coal-fueled power plants in Korea performed better than those in Shanghai. The CO2 MAC results indicate that, despite the small gap in efficiency performance, the CO2 MAC of coal-fueled power plants is much higher than that in Shanghai due to the big feed-in tariff difference. This is because the MAC not only relates to the environmental efficiency, but also to the feed-in tariff. A higher feed-in tariff leads to higher MAC. To tackle this serious problem, which has also been addressed in previous studies, we suggest that policymakers should focus on the huge CO2 MAC differences caused by feed-in tariff differences to avoid equity problems when building the structure of the Shanghai-Korea ETS cooperation. For instance, compared with power plants in Shanghai, policymakers should set a looser cap and a higher offset for Korean plants. To reduce the impact of feed-in tariff on carbon trading in the market, it would also be effective to arrange a higher quota or a lower carbon tax for coal-fueled power plants in Korea. In addition, policymakers should fill the gaps of 85.15% and 67.6% between the realistic market price and the MAC results of coal-fueled power plants in Shanghai and Korea, respectively, by introducing stricter regulations.
Highlights
From 30 November to 12 December 2015, more than 180 countries of the United Nations Framework Convention on Climate Change (UNFCCC) met in Paris to deal with greenhouse gas-emissions mitigation, adaptation, and finance in the 21st Conference of the Parties (COP21)
As shown in this table, the average group environmental efficiency (GEE) value of coal-fueled power plants in Shanghai is 0.9289, indicating that, on average, coal-fueled power plants in Shanghai can increase their environmental efficiency by approximately 7.11% if all of them operate by group production technologies
The average GEE value of coal-fueled power plants in Korea is 0.9218, which indicates that, on average, coal-fueled power plants in Korea can increase their environmental efficiency by approximately 7.82% if they operate by group production technologies
Summary
From 30 November to 12 December 2015, more than 180 countries of the United Nations Framework Convention on Climate Change (UNFCCC) met in Paris to deal with greenhouse gas-emissions mitigation, adaptation, and finance in the 21st Conference of the Parties (COP21). China and Korea will exchange market information and share experience on ETS operations They agreed to expand cooperation on ETS, including joint efforts to link ETS in these two countries. Due to the huge differences in economic scale, population size, economic development stage, and social and legal systems between China and Korea, it is unrealistic to pursue international ETS cooperation at a national level in the short term. Following China’s approach of establishing pilot regions and pilot industries in the development of a carbon market, China and Korea should conduct pilot international cooperation in areas of similar economic scale and development stage. Given that the charcoal power industry plays the most important role in the carbon market in both China and Korea, the coal industry is the first choice for the regional cooperation pilot project.
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