Applied Energy

Volume 184, 15 December 2016, Pages 1114-1122

Achieving China’s INDC through carbon cap-and-trade: Insights from Shanghai

https://doi.org/10.1016/j.apenergy.2016年06月01日1 Get rights and content

Highlights

  • •
    We assessed emission trading policy among sectors in Shanghai of China.
  • •
    We assessed the economic impacts of carbon emission trading.
  • •
    Trading behavior largely depends on burden sharing and renewable energy.
  • •
    Emission trading could reduce the economic costs of achieving China’s INDC target.

Abstract

Emission trading scheme (ETS) is considered as a cost-effective way to cut emissions. This study evaluates the economic impacts of ETS policy by using a static computable general equilibrium (CGE) model in Shanghai, one of China’s seven ETS pilots. Three scenarios are set considering the target of Intended Nationally Determined Contributions (INDC) by 2030, including a reference scenario, carbon cap without ETS scenario and with ETS scenario. This study shows that ETS would reduce GDP loss due to carbon mitigation from 1.3% to 1.1% relative to baseline level in 2020 and 2.3% to 2.2% in 2030. The trading carbon price in 2020 and 2030 would be 38 and 69 USD/ton and the trade volume would be 4.9 and 6.2 million ton carbon dioxide, respectively. Air transport sector would be the major buyer of emissions credit due to its comparatively higher carbon abatement cost whereas iron & steel, electricity sectors would be the main sellers. However, the above findings are sensitive to various policy arrangements such as renewable energy development and carbon allowance allocation method. This study concludes that carbon cap-and-trade could reduce adverse economic output and employment impact. Policy makers should carefully design the cap allocation scheme since it is a key factor that determines carbon trading price and trade volume.

Introduction

Since 2005, GHGs cap-and-trade systems have been established in a number of countries. Previous studies confirm that market-driven CO2 emission reduction policies can alleviate economic loss compared to mandatory policies [1], [2]. China’s Intended Nationally Determined Contributions (INDC) were announced to achieve a carbon dioxide (CO2) emissions peak around 2030 and lower CO2 emissions per unit of GDP by 60–65% from the 2005 level by 2030 [3]. To achieve this target in a cost-effective way, China plans to launch its national emission trading scheme (ETS) in 2017, covering key industrial sectors such as iron and steel, power generation, chemicals, building materials, paper, and nonferrous metals [4]. Before designing and initiating a national ETS, seven regional pilot markets were established between 2013 and 2014 to gather experience and lessons. In total, these seven ETS pilot markets emitted 1159 Mt CO2 [5], less than European (EU)-ETS. The pilot markets share some common features. For instance, most allowances are allocated without any charges. On the other hand, regional disparities exist, such as coverage, cap setting, permit allocation and trade provisions [6].
Shanghai is the most advanced mega-city in China. Although its population accounts for only 1.4% of the national total, it consumes 2.2% of China’s coal, 8.4% of petroleum, and 3.8% of natural gas (Table 1). In order to save energy and mitigate climate change, Shanghai government initiated its own plan to peak conventional fossil fuel consumption, per capita energy consumption and carbon emissions by 2020 [7]. In November 2013, Shanghai launched China’s second carbon ETS after Shenzhen City. Shanghai ETS pilot market covers 190 enterprises and 57% of the city’s total emissions. The participating sectors for ETS include industrial sectors such as textile, paper, oil refinery & coking, chemicals, cement, other nonmetal, iron and steel, nonferrous metal, electricity, as well as non-industrial sectors such as air transport, railway stations, ports, airports, hotels, shopping malls, and financial firms. The difference between Shanghai pilot market and others is that the carbon allowances for different years are allocated to the enterprises at one time. Borrowing allowances from subsequent years for compliance purposes is prohibited but banking is allowed [8].
Modeling carbon cap-and-trade prior to its implementation is crucial to evaluate the emissions reduction effects and corresponding socio-economic impacts. ETS, especially EU-ETS, has been extensively studied by using different models [9], [10], [11] and mainly focused on two aspects: economic impact and operating mechanism. For economic impact, Zhang et al. [12] simulated the establishment of a multi-region integrated ETS with several countries and investigated the economic and energy impacts. At the national level, most studies examined the abatement cost reduction with the national ETS [2], [13], [14], [15]. Moreover, Zhang et al. [16] compared the economic impacts of different targets for China with ETS. Tang et al. [17] simulated the allocation of emission permits and indicated that ETS could promote inter-regional equity in China as an income transfer measure. At the provincial level, several studies analyzed the impacts of ETS on the regional economy [18], [19], as well as co-benefits like air pollutant emissions reduction [20]. For operating mechanism, more concerns were raised about allowance allocation and pricing. Some studies compared the abatement incentives and macroeconomic effects of different allowance allocation approaches, such as grandfathering, benchmarking and auction [21], [22], [23]. Zhang et al. [24] analyzed the equity of permit allocation schemes for Chinese provinces. Zhang et al. [25] assessed the impact of China’s carbon allowance allocation rules on the product prices. Chang and Chang [26] figured out the appropriate provincial carbon intensity reduction burden shares under interprovincial ETS in China. Feng et al. [27] examined carbon price volatility of EU-ETS. He [28] found that the carbon prices in the current ETS pilots in China were much lower than the marginal CO2 abatement costs, implying inefficiency of the market.
Most of the above studies investigated the inter-regional carbon emission trading and regional differences in carbon abatement cost, but rarely focused on permit trading among different sectors. Consequently, this paper aims to study emissions trading at the sectoral level by quantifying the economic impacts of the ETS policy in Shanghai, under the circumstance of achieving China’s INDC. Furthermore, we explored the key factors that influence the trading behavior of different sectors. The following three questions will be answered in this study: To what extent could Shanghai ETS reduce carbon abatement costs in the next decade? What will be the trading price and volume, and which sectors will be the major emission credit buyers in the market and which sectors will be the major sellers? What are the impacts of Shanghai ETS on economic output and employment at the sectoral level? And what are the key factors that affect the formation of a carbon market? In order to address these issues, a static two-region computable general equilibrium model (CGE) will be developed for Shanghai.
This paper is organized as follows. In Section 2, a CGE model, data collection and scenarios design are introduced. Section 3 presents research results, including the impact of ETS on carbon emissions, macro-economies, sectoral output, and employment. Next, Section 4 discusses policy implications for Shanghai and the national ETS. Finally, conclusions are drawn in Section 5.

Section snippets

The static CGE model

The CGE model could capture the full range of interaction and feedback effects between different agents in the economic system. It has been widely used to assess the economic and environmental impacts of different climate policies at global [29], [30], [31], national [32], [33], [34] and provincial [18], [20], [35], [36], [37] levels. This study employs a static CGE model jointly developed by National Institute for Environmental Studies (NIES) in Japan and Shanghai Jiao Tong University in

Carbon emissions and intensity

Fig. 2 shows that in the BaU scenario, total CO2 emissions of Shanghai will increase by 70% in 2020 and 102% in 2030 relative to the 2007 level of 194.2 Mt. When implementing emission constraint policies, i.e., in CAP and ETS scenarios, emissions will decrease by 15% (26%) in 2020 (2030). Carbon intensity of Shanghai is 1.2 kgCO2/USD in 2007, much lower than the average level of China (1.7 kg/USD). In the BaU scenario, Shanghai’s carbon intensity will decrease by 35% in 2020 and 52% in 2030

Sensitivity analysis

The above key findings in this study may be sensitive to various factors, including socio-economic assumptions, renewable energy development level and burden-sharing scheme among different sectors. To observe the effects of these factors we perform sensitivity analysis with five additional scenarios (Table 3). In cases 1 and 2 we increase and decrease the average GDP growth rates by 10.1% and 8.4%, respectively; in case 3 we assume China could not achieve the renewable energy target; in cases 4

Conclusion

By applying a two-region CGE model, this study evaluated the economic impacts of the carbon ETS policy in Shanghai. Simulation analysis shows that under the carbon cap allocation scheme assumed in this study, the mitigation costs of air transport and oil refinery & coking sectors would be relatively high in the without ETS scenario, whereas iron & steel sector has a low mitigation cost. Therefore, in the scenario with emission trading, air transport sector would be the biggest buyer while the

Acknowledgments

This study is funded by the Natural Science Foundation of China (71461137008, 71325006), the Environmental Research and Technology Development Fund (S-12-2 and 2-1402) of the Ministry of the Environment, Government of Japan. The authors are grateful for the comments from anonymous reviewers of this paper.

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