Comparing potential cost savings of energy quota trading and carbon emissions trading for China's industrial sectors

Abstract

In response to the severity of its environmental problems, China is fully promoting the construction of a national energy quota trading (EQT) market and a national carbon emission trading scheme (ETS). However, there is currently a lack of studies comparing the cost savings of EQT and ETS from the perspective of different industries in different provinces under the same environmental regulation. To fill this gap, this paper first estimates the shadow price of energy and CO2 in 30 Chinese provinces' 38 industrial sectors using provincial-industrial level data from 2005 to 2016 based on the duality theory of non-radial directional distance function. Thus, at the methodological level, this study also overcomes the shortcomings of the DEA method used in most previous studies, that is, it is not appropriate for the cross-industry and cross-province heterogeneity characteristics of the research target. It then evaluates the cost savings of EQT and ETS by simulating actual trade scenarios. We find that the single EQT market obtains greater cost-saving benefits than the mixed market and the single ETS market with the same environmental target. We suggest that the energy consumption units should choose the trading market based on their energy-saving and emissions reduction costs, which is more conducive to achieving the set environmental goals and obtaining cost savings, taking into account different regional industry structures, natural resources, and environmental regulation intensity.