Exploring linkage opportunities for China's emissions trading system under the Paris targets——EU-China and Japan-Korea-China cases

Abstract

Linking emissions trading systems (ETSs) in developing and developed countries is expected to serve as an important cooperative approach for achieving the Paris Agreement targets. As one of the first developing countries leveraging ETS to achieve domestic climate targets, China's involvement will significantly impact the market-based cooperation landscape. This study investigates two prospective linkage options for China's ETS, including the linkage with the EU ETS and the linkage with Japan's and Korea's ETSs under three different emission reduction targets, and analyzes the emissions, energy and economic impacts of both full linkage and limited linkage on China and its linkage partners using a global general equilibrium model. We find that full linkage could bring the largest welfare gains for each participant, but it also causes a loss in international competitiveness of China's domestic sectors and impedes the deployment of renewable energy in China's linkage partners. With the strengthening of emission constrains, the adverse impacts of full linkage intensify. If a limit is set on the volume of permits trading, carbon price changes are more moderate in each participant and the adverse impacts on international competitiveness of China and on renewables development of its linkage partners are lessened, at the expense of reduced welfare gains. Therefore, national policy-makers have to strike a balance between welfare gains and other policy objectives when considering linking their emissions trading systems. A limited linkage is more politically feasible and can be established initially and the restrictions on partner's permits may be loosened over time as the balance between different policy objectives is achieved.