Sector Coverage of Carbon Market at the Presence of Uncertainty

Abstract

When there exist uncertainties, different carbon pricing mechanisms usually lead to different results. Some sectors will suffer more in the presence of uncertainties while other sectors suffer less. Thus choosing appropriate sectors to impose low carbon policy would be quite important in order to avoid worse economic outcome. We propose a new indicator which is called “optimal return rate” to facilitate determining the sector coverage. The sector with a low optimal return rate should be given high priority to be imposed low carbon policy and vice versa. We also conduct a numerical simulation using China’s real data to calculate optimal return rates of China’s sectors. Simulation results show that most energy-intensive sectors have quite low optimal return rates and should be first included in either emission trading scheme or carbon tax scheme. Moreover, sectors included in the first stage of building China’s national carbon emission trading scheme are also in accordance with our simulation results. This means the new indicator has great power in guidance of building China’s national carbon emission trading scheme in the future.