Efficiency or Equity? Simulating the Carbon Emission Permits Trading Schemes in China Based on an Inter-Regional CGE Model

Energy conservation and greenhouse gas (GHG) abatement have been included in the national development strategy of China, however, the rigidity in command-and-control, absence of market-mechanism and arbitrariness in assignment of abatement burden across regions have caused unnecessary losses in both economic efficiency and social equity. In this paper, we established an Inter-Regional CGE model based on which we simulated economic output and social welfare impacts, on national and regional level, of climate policies including carbon taxation and emission constraints (with and without emission-trading). The simulation results indicated a marginal abatement cost (MAC) of 166.19 Yuan/t CO2 for 20% emission reduction in carbon taxation scenario, and will lead to 3.18% decrease in total output and 2.54% decrease in total welfare of China. While under emission constraints, economic and welfare effects are sensitive to the allocation of emission permits and to whether the permits are tradable. Comparison of the policy scenarios indicated that emissiontrading scheme can moderate the economic and social welfare losses, regardless of the allocation of emission permits. More importantly, it also narrows the difference between economic and welfare losses of alternative allocation of emission permits. From this perspective, emission-trading bridges the concerns for economic efficiency and social equity, since emission permits could be reallocated as an income transfer mechanism, so as to promote inter-regional equity, while economic efficiency is maintained. In the last scenario, we model the allocation of emission permits which equalizes welfare losses of emission reduction across regions.