The role of carbon pricing in achieving energy transition in the Post-COP26 era: Evidence from China's industrial energy conservation

Abstract

Carbon pricing is expected to meet COP26 targets and carbon neutrality goals by promoting energy transition. However, the role of carbon pricing in energy transition has been challenged largely because of limited empirical evidence. Most empirical studies draw on samples with low-to-moderate carbon prices, which might underestimate the potential impact of carbon pricing with much higher prices. Accordingly, this study takes energy prices as proxies for carbon prices to estimate the price elasticity of energy consumption. It employs a mapping relationship between carbon and energy prices to conduct simulations under various carbon price scenarios. Using China's industry as an example, the following main findings were obtained. First, the price elasticities of energy consumption are heterogeneous across sectors, implying that the role of carbon pricing may be underestimated if sector heterogeneity is not considered. Second, carbon pricing could considerably decrease energy consumption, particularly in high-energy-consuming sectors, such as ferrous metals, petroleum processing, chemicals, non-metal products, as well as power and heat. Third, by adopting China's Emissions Trading Scheme, the eight planned covered sectors could achieve reductions of 8% or 19% in energy consumption with carbon prices set at 100 or 300 Yuan/tCO2, respectively, which would significantly contribute to the phasedown of coal. Therefore, carbon pricing could play an important role in achieving energy transition in the post-COP26 era.