Synergistic Effects of Carbon Pricing and Power Market Reform on CO <sub>2</sub> Emissions Reduction in China's Electricity Sector

Abstract

China is pursuing aggressive action to reduce greenhouse gas emissions from its coal-dominated electric power system. Two key strategies are power market reform and carbon pricing. This paper investigate the synergistic effects of these two strategies in reducing CO2 emissions from power system operations. We develop an economic dispatch model to simulate hourly power supply system operation in China Southern Power Grid in 2018 under fifteen carbon pricing scenarios; these reflect a wide range of policy ambition, from today’s carbon prices to much higher ones that aim to instigate aggressive emission mitigation. Our results show that moderate carbon pricing alone is insufficient to effectively reduce CO2 emissions without concurrent power sector reform. With power sector reform and as carbon prices increase, large coal units supplemented by energy storage witness higher use rates as they supplant smaller coal-fired generators, until a carbon price of 300 RMB/TCO2 phases out coal use in favor of natural gas. Only at carbon prices higher than 300 RMB/TCO2 do emissions begin to decrease appreciably. Geographic disparities emerge among the five provinces that comprise the Southern Power Grid, with Guangdong witnessing the most CO2 emission reduction at high carbon prices, while emissions reduction in other provinces are negligible. Carbon pricing also dramatically increases total power system costs, even at low carbon prices. Our results show the necessity of introducing power sector reform and carbon pricing policies concurrently if the goal is to reduce CO2 emissions, with the ultimate goal being a carbon price significantly greater than 300 RMB/TCO2. Because both options will be necessary, our research maps a path to deep emission reductions in China Southern Power Grid for investors, analysts, and policy makers as discussions regarding both reforms accelerate.