Inequality impacts of ETS penalties: A case study on the recent Chinese nationwide ETS market

Abstract

Climate change induces inequality, and climate policies to cope with climate change may unexpectedly further increase inequality. Within the domains of climate policies, punishment mechanisms are vital to ensure policy effects; nevertheless, very few studies have focused on inequality impacts of punishment mechanisms. In this paper, we attempt to narrow the research gap by using a dynamic recursive Computable General Equilibrium (CGE) model to analyze how the designed ETS penalties affect inequality in China. The CGE model results show that ETS penalties induce uneven distribution of mitigation costs, output loss, and emission abatement among the sectors. ETS penalties slightly decrease household income and consumption inequality, denoted by the Gini coefficients; however, people's negative feelings about inequality are positively related to ETS penalties. The results imply that the current Chinese nationwide ETS market is not stringent enough to effectively achieve mitigation targets. In such a loose ETS policy, ETS penalties cannot give full play to regulate emission non-compliance and thus have minimal impacts on inequality. Hence, worldwide policymakers should not design too loose ETS policies to avoid undermining ETS punishment mechanisms.