Coordination between the energy-consumption permit trading scheme and carbon emissions trading: Evidence from China

Abstract

Market-oriented instruments are expected to minimize energy costs and carbon abatement, but interactions among them may create challenges. The Chinese government issued a pilot energy-consumption permit trading scheme (ECPTS) in Fujian Province, where the carbon emissions trading scheme (ETS) is in operation, thus providing an opportunity to analyze the interactions between two related market instruments. Based on the game-fixed cost allocation model and leader-follower game model, this paper designed an allocation scheme of energy-consumption permits (ECPs) based on coordination, efficiency and equity, and compared the differences in the caps, allocation structure and regional economic inequity among cities. The results of the Fujian case study show that when considering the optimal cross efficiency, the allocation of ECPs and carbon allowances are dominated by coastal cities with booming economies, which may entrench economic inequality between cities in Fujian. By introducing the equity principle, the allocation structure of ECPs among cities will change significantly, especially in underdeveloped cities. With the coordination mechanism of the ECPTS and ETS, the inequity in the distribution of economic development rights among cities can be moderated, which indicates that the designed approach has advantages in resource allocation. In addition, it is more conducive to energy saving and emission reduction if the provincial government prioritizes the allocation efficiency of ECPs instead of carbon allowances.