Optimal investment and uncertainty on China's carbon emission abatement

Abstract

To realize environmentally sustainable development of the economy, China has decided to cut carbon dioxide emissions per unit of GDP by 40 to 45 percent by 2020, compared with the level in 2005. Based on China's emission abatement target, this paper first analyzes enterprises' emission reduction pathways in practical production processes, and then develops a framework to derive the magnitude of investment required in each pathway in order to achieve the designated target at the minimal cost. Under the framework, it is found that in the absence of policy guidance, individual enterprises' emission reduction investments deviate from the optimal level. To correct the distortion, an alternative option is provided. Meanwhile, to ensure achievement of the emission reduction target, a stochastic model is introduced to measure the uncertainty arising from emission abatement investment. The results show that an appropriate emission abatement ratio can reduce ‘the systemic risk’ of emission abatement. Finally, a simulation is given to demonstrate the results derived from the stochastic model.