China’s Nationwide CO2 Emissions Trading System: A General Equilibrium Assessment

China’s recently launched CO2 emissions trading system, already the world’s largest, aims to contribute importantly toward global reductions in greenhouse gas emissions. The system, a tradable performance standard (TPS), differs importantly from cap and trade (C&T), the principal emissions trading approach used in other countries. This paper presents the structure and results from a multi-sector, multi-period equilibrium model tailored to evaluate China’s TPS. The model incorporates distinctive features of China’s economy, including state-owned enterprises and electricity market regulation. It distinguishes between the TPS and C&T and considers a wide range of potential future TPS designs.
Key findings include the following. The TPS’s environmental benefits exceed its costs by a factor of five when only the climate-related benefits are considered and by a significantly higher factor when health benefits from improved air quality are included. The TPS’s interactions with China’s fiscal system substantially affect its costs relative to those of C&T. Employing a single benchmark (standard) for the electricity sector would lower costs by 34 percent relative to the four-benchmark system that is actually in place but increase the standard deviation of percentage income losses across provinces by more than 60 percent. Introducing an auction as a complementary source of allowance supply can lower economy-wide costs by at least 30 percent.