Transfer payments in emission trading markets: A perspective of rural and urban residents in China

Abstract

Human activities cause massive CO2 emission, and the Emission Trading Scheme (ETS) is currently one of the most effective methods of emission reduction. Few studies focus on the impact of different transfer payments in ETS on rural and urban population. This paper establishes a dynamic recursive Computable General Equilibrium (CGE) model and constructs 3 counter-measure scenarios (i.e. payment methods based on income, direct tax and population, respectively), following China's pilot ETS pattern, to analyze and provide insights on the best option for the government to transfer ETS revenues to rural and urban population. The results show that commodity consumption, energy consumption, direct tax, and social welfare will be significantly impacted by ETS transfer payments, while commodity price and household savings will be less affected. For rural population, more transfer payments will lead to an increase in consumption levels in the ETS transfer payments scenario based on population, despite the rise in commodity prices. Moreover, the payments based on population can also reduce by 15.09 billion tons of CO2 emission during 2017–2030. Therefore, this paper suggests that the ETS transfer payments method should be based on population.