Combining mandatory coal power phaseout and emissions trading in China's power sector

Abstract

China has launched its nationwide emissions trading system (ETS) in the power sector. Meanwhile, a mandatory phaseout policy for coal power is likely to be co-existing with China's nationwide ETS. These co-existing policies would interact with each other and, in certain cases, lead to unintended consequences, such as a policy overlap. This study aims to assess the impact of such combined policy in China by developing a multi-regional dynamic Computable General Equilibrium (CGE) model with specified modules of mandatory coal power phaseout and ETS. The results show that the impact of such policy combination depends on the type of ETS. Under China's current rate-based ETS, the co-existence of mandatory coal power phaseout would enhance the policy stringency and increase the coal power generation losses, carbon emission and intensity reductions. In contrast, the mass-based ETS with the combination of mandatory coal power phaseout would lead to a policy overlap and potential market failure in the ETS. The complementary provincial impacts and permit scarcity are two factors that could explain the combination mechanism of these policies. Furthermore, permit cancellation in a mass-based ETS would prevent the potential market failure but may lead to greater economic losses.