A general equilibrium analysis of floor prices for China's national carbon emissions trading system. (17th December 2018) - Weng, Yuyan
ABSTRACT: China announced the official start of its national emissions trading system (ETS) construction programme in December 2017, making ETS the primary policy to achieve China's domestic decarbonization targets and global climate change pledges. Unlike ETS designs in other regions, China's ETS features a flexible cap that is linked to both reduced carbon intensity and activity levels. Therefore, total CO2 emissions are allowed to increase if economic growth is strong – an important design feature for developing countries that demand an increase in CO2 emissions at least in the near term. Therefore, to guarantee that the carbon price signal emerging from the ETS is strong enough to support the achievement of China's climate change targets given uncertainties in economic growth, technology improvement and renewable energy development, China's ETS needs a carbon price floor. In this study, we simulate carbon price paths in different scenarios representing different uncertainty realizations using the China-in-Global Energy Model (C-GEM) and find that a price path of $4 before 2020, $8 between 2021 and 2025 and $12 between 2026 and 2030 (2011 constant price) is able to support the achievement of China's climate pledges with a 90% chance. Therefore, this price path could be adopted as a feasible carbon price floor for China's ETS. Key policy insights A carbon price floor in China's ETS is needed to achieve China's climate pledges under uncertainty. Multiple dimensions of uncertainties need to be considered when estimating the carbon price floor. Under our representative estimation, the carbon floor price path needs to be set at $4 per ton before 2020, $8 per ton between 2021 and 2025, and $12 per ton between 2026 and 2030.