Policy Interactions and Underperforming Emission Trading Markets in China

Abstract

Emission trading is considered to be cost-effective environmental economic instrument for pollution control. However, the ex post analysis of emission trading program found that cost savings have been smaller and the trades fewer than might have been expected at the outset of the program. Besides policy design issues, pre-existing environmental regulations were considered to have a significant impact on the performance of the emission trading market in China. Taking the Jiangsu sulfur dioxide (SO2) market as a case study, this research examined the impact of policy interactions on the performance of the emission trading market. The results showed that cost savings associated with the Jiangsu SO2 emission trading market in the absence of any policy interactions were CNY 549 million or 12.5% of total pollution control costs. However, policy interactions generally had significant impacts on the emission trading system; the lone exception was current pollution levy system. When the model accounted for all four kinds of policy interactions, the total pollution control cost savings from the emission trading market fell to CNY 39.7 million or 1.36% of total pollution control costs. The impact of policy interactions would reduce 92.8% of cost savings brought by emission trading program.