Energy, economic and environmental impact of government fines in China's carbon trading scheme

Abstract

Carbon emissions caused by human activities have exploded in recent years. Emission Trading Scheme (ETS) is a feasible way to reduce CO2. Little research concentrated on the ETS fines for excessive emission. We analyzed the different impacts of fine mechanisms in ETS by applying computable general equilibrium model and constructed seven scenarios. We found that although Gross Domestic Product (GDP) loss is not significant when applying ETS market, GDP loss would increase rapidly when ETS fine increases. The CO2 abatement effect of alterable ETS fine is a bit better than that of fixed fine. Higher fines will cause relatively lower carbon intensity compared with lower ETS fines, which is caused by different emission reduction effect in different scenarios. It seems that ETS fines cannot affect reduction costs as significantly as GDP loss rate and emission reduction. ETS fine can affect significantly ETS cost of enterprises, commodity price and output of energy-intensive industries as well as GDP loss and CO2 abatement, but can less influence carbon emission intensity and reduction cost. A proper ETS fine is very important and ETS fines in China's ETS market are 2–3 times of carbon price. We consider that the current government design is reasonable.