Carbon emission trading system of China: a linked market vs. separated markets

Abstract

The Chinese government intends to upgrade its current provincial carbon emission trading pilots to a nationwide scheme by 2015. This study investigates two of scenarios: separated provincial markets and a linked inter-provincial market. The carbon abatement effects of separated and linked markets are compared using two pilot provinces of Hubei and Guangdong based on a computable general equilibrium model termed Sino-TERMCo2. Simulation results show that the linked market can improve social welfare and reduce carbon emission intensity for the nation as well as for the Hubei-Guangdong bloc compared to the separated market. However, the combined system also distributes welfare more unevenly and thus increases social inequity. On the policy ground, the current results suggest that a well-constructed, nationwide carbon market complemented with adequate welfare transfer policies can be employed to replace the current top-down abatement target disaggregation practice.