The impact of China's carbon allowance allocation rules on the product prices and emission reduction behaviors of ETS-covered enterprises

Abstract

It is an important task for China to allocate carbon emission allowance to realize its carbon reduction target and establish carbon trading market. China has designed several allocation rules within seven pilot regions. What influence those rules may cause is closely related with the enthusiasm of emission trading scheme (ETS) covered enterprises' participation in carbon market, and more importantly, with the mechanism design and sustainable development of carbon market. For this purpose, the multi-stage profit model is developed to analyze the ETS-covered enterprises' product prices and emission reduction behaviors under different allocation rules. The results show that, first, under the rules of grandfathering, self-declaration and auctioning, when deciding the optimal product price and optimal carbon emission reduction, those enterprises may focus on maximizing current stage profit; however, under the rule of benchmarking, those enterprises may care more about the impact of current decisions on the profit in next stage. Second, the optimal product price policy is positively correlated with the price of the same kind products, consumers' low-carbon awareness and government subsidy. Finally, along with the increase of carbon price, consumers' low-carbon awareness and government subsidy and the decrease of carbon emission cap, those enterprises tend to reduce carbon emissions.