The dilemma for China’s national carbon trading market: minimizing carbon abatement costs or maximizing net social benefits?

Abstract

After a decade of planning and trials, China officially launched a national carbon trading in July 2021. Using a standard economic model, this study shows that an unconstrained carbon trading market would face a dilemma between minimizing pollution control costs and maximizing social benefits. We further show that this would be a significant challenge in China. Our results show that areas with higher population densities also would have higher costs for carbon reduction, and hence the polluters in those areas would be net buyers in the national market. Moreover, our analysis indicates a significantly high correlation between carbon dioxide emissions and other local pollutants. Therefore, cross-regional transactions may result in more emission of other pollutants in areas with higher population density under the unconstrained national cap-and-trade system and cause larger losses in social benefits. We call for more studies to address the issue.