Low carbon growth in China: The role of emissions trading in a transitioning economy

Abstract

China’s leaders are increasingly committed to low-carbon economic development. Although China’s economy has dramatically transformed since the initiation of economic reforms in 1978, it is still structurally different from post-industrial, high-income countries, and economic reform is ongoing. At the same time, China is taking major steps towards regulating its carbon dioxide emissions. China is currently preparing to implement a national carbon dioxide emissions trading system (ETS), which will be the largest ETS in the world. Our analysis demonstrates how these major economic and emissions policies are linked in China’s economy. We use a dynamic computable general equilibrium (CGE) model of China’s economy to simulate the interaction between a structural transition policy and a national ETS. We demonstrate an important policy instrument – the household savings rate – for stimulating economic transition. We show that by increasing consumption in lower emissions-intensity sectors, China can sustain growth in its economy while reducing emissions and transitioning to a more OECD-like economic structure. In addition, emissions reductions from an ETS regulation can be achieved at a lower cost for regulated firms when taking into account the changing structure of the economy.