The impact of emission trading scheme and the ratio of free quota: A dynamic recursive CGE model in China

To cope with global warming, China has promulgated Enhanced actions on climate change: China’s intended nationally determined contributions and will start the national carbon emissions trading market in 2017. Carbon emissions are distributed by the form of free quota and paid quota. However, few literatures have focused on how the economy and the environment would be changed by the change of free quota ratio. This paper establishes the 10 scenarios of different free quota ratio of carbon emissions rights and uses a dynamic, recursive computable general equilibrium (CGE) model to simulate the carbon emissions trading market, to explore the relationship between free quota ratio and carbon trading price, and the impact of carbon trading scheme (ETS) on China’s economy and environment. The results show that free quota ratio will not have a direct impact on gross domestic product (GDP) and other economic and environment indicators but carbon trading prices. The prices and the rate of free payment in the current pilot cities in China are still relatively conservative. It is possible to reach emission peak, 8.21billion ton, in 2025 and accumulative CO2 reduction from 2017 to 2030 is 20.02billion tons, or 59.60% of 2010 world’s total CO2 emission. Cement, minerals, electricity and nonferrous metals under ETS will suffer great losses, so subsidy should be considered. Finally, we suggested that China should reduce the total carbon rights to increase the carbon price in 2017, and gradually reducing the proportion of free quota, from 90% in 2017 to 50% or less in 2030, by which the peak year of CO2 emission can meet in 2025. We also suggest that ETS is an effective strategy for CO2 reduction and the ratio should be gradually reduced in ETS to prevent violent fluctuation of carbon price in China.

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