TPS and C&T costs under varying policy stringencies

China's unconventional nationwide CO2 emissions trading system: Cost-effectiveness and distributional impacts

Peer Reviewed
31 December 2021

Lawrence H. Goulder, Xianling Long, Jieyi Lu, Richard D. Morgenstern

China is implementing what is expected to become the world's largest CO2 emissions trading system. To reduce emissions, the nation employs a tradable performance standard (TPS), a rate-based instrument differing significantly from cap&trade (C&T) and a carbon tax, emissions pricing instruments used elsewhere. With matching analytically and numerically solved models, we assess the cost-effectiveness and distributional impacts of China's TPS for reducing CO2 emissions from the power sector.

The TPS implicitly subsidizes electricity output, which limits the use of output-reduction as a channel for reducing emissions. It also gives power plants with especially low emissions-output ratios incentives to expand output relative to business-as-usual levels. These features compromise the TPS's cost-effectiveness relative to C&T. The use of differing benchmarks (emissions-intensity standards) also compromises cost-effectiveness by distorting relative production levels and by lowering the cost-reducing potential of allowance trading. In our central case simulations, the TPS's overall costs are about 34 percent higher than those of C&T.

Although the use of non-uniform benchmarks compromises cost-effectiveness, it can help serve regional distributional objectives. We assess the aggregate costs of customizing benchmarks in order to reduce the adverse profit impacts in provinces that otherwise would suffer a disproportionate cost from the TPS.

EfD Authors
Sustainable Development Goals
Publication reference
Goulder, L. H., Long, X., Lu, J., & Morgenstern, R. D. (2022). China’s unconventional nationwide CO2 emissions trading system: Cost-effectiveness and distributional impacts. Journal of Environmental Economics and Management, 111, 102561.
Publication | 24 October 2022