Heterogeneous environmental consciousness, carbon permit adoption, and endogenous growth: A case of China

Abstract

Motivated by low participation rate in China’s pilot Emission Trading Schemes (ETS), yet there being ample empirical evidence of carbon permit activities having an impact on firms’ technological innovation choice, we develop a novel endogenous growth model with carbon accumulation where both the green behaviors of non-corporate individuals and carbon permit adoption choice of corporate owners are influenced by heterogeneous environmental consciousness. Calibrated for China based on ETS price data, we examine the impacts of both long-run policy experiments and short-run cyclicality associated with carbon permit prices. we find that long-term greater ETS trading affordability would incentivize more firms to participate and bring about a reduction in carbon ratio, though it is still largely bounded by the conventional environment-growth trade-off that it requires supplementing it with other policies. In the short run, we find that higher carbon permit trading price would be procyclical to economic expansion but at the cost of environmental degradation too. In combination, this presents a policy dilemma: while improving ETS trading affordability is a long-run policy priority in China, in the short-run, absent fundamental changes, the procyclicality between carbon permit price and economic growth would serve as counteracting forces to this.