Can energy quota trading reduce carbon intensity in China? A study using a DEA and decomposition approach

Abstract

Energy quota trading (EQT) is a market-driven method to reduce distortions in energy allocation. In 2016, an EQT policy was proposed in China. However, the economic and environmental effects of this new policy remain unclear. To study these problems, this paper conducts an empirical analysis using data envelopment analysis (DEA) and index decomposition analysis (IDA). Following a simulation of the optimal energy input and maximum output in three sectors of the 30 Chinese provinces that have adopted China's EQT policy, the main conclusions are as follows: (1) The energy consumption of the industrial sectors is excessive, yet the primary and service sectors need further energy input, while there is vast economic potential in China's western provinces and the service sectors. (2) The optimal energy intensity effect generated by the trading policy is the largest impetus of carbon intensity reduction in China, but the obstacles to carbon intensity reduction are different in each region. (3) EQT has the potential to drive a significant decline in carbon intensity in China, resulting in a simulated average annual decline of approximately 4.09% from 2005 to 2016.