Emissions, energy and economic impacts of linking China’s national ETS with the EU ETS

Abstract

With the increasing popularity of emission trading system (ETS) worldwide and the necessity of international cooperation on climate change, the interest of linking various ETSs is growing. This paper adopts a multi-regional, general equilibrium model to simulate linkages between China’s national ETS and the EU ETS and analyze the emissions, energy and economic impacts of such linkages. In order to study the role of linking in further increasing mitigation ambitions of China and the EU, and compare unlimited linkage with limited linkage, the paper further develops scenarios in which both China and the EU set higher ambition cap for their ETSs and unlimited or limited linkage is established between the two ETSs. The results indicate that unlimited linking can effectively promote the emission reduction ambitions of both China and the EU without inducing additional welfare losses to them. When both China and the EU set more intensified targets for ETS sectors and undertake additional 169 million tons carbon reductions, unlimited linking can make China’s welfare remain basically unchanged and the EU’s welfare increase by 0.29%, compared to implementing ETS independently under original reduction targets. However, unlimited linking has adverse effects on the competitiveness of China’s energy intensive sectors and the development of EU’s renewable energy. Compared to unlimited linking, limited linking effectively reduces these adverse effects. The paper concludes that China’s national ETS and the EU ETS can establish a linkage to further increase their ambitions, while at the same time use import quotas to limit the permits that can be traded to reduce the negative impacts of linking on the two systems.