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Long-term impacts of carbon allowance allocation in China: An IC-DCGE model optimized by the hypothesis of imperfectly competitive market

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  • Wu, Qunli
  • Ma, Zhe
  • Meng, Fanxing

Abstract

This study presents the construction of a 14-sector, recursive dynamic CGE model and introduces the hypothesis of imperfect competition as the model's improvement. The novel CGE model (IC-DCGE), which is calibrated with the 2017 social accounting matrix, is used to examine the impact mechanism of free-quota ratios on the economy–energy–environment system. Five simulation scenarios are designed with different free-quota ratios and one BAU scenario as a benchmark. The conclusions drawn from this study are as follows: (i) GDP loss due to the ETS policy is typically underestimated in previous studies using the traditional CGE model with a hypothesis of the perfectly competitive market, and the loss could be alleviated with a high free-quota ratio. (ii) Changes in outputs and commodity prices of the ETS-covered industries are more apparent than those of the remaining industries, and the most conspicuous change occurs in the power industry. (iii) Less free-quota ratios would yield better performance in CO2 mitigation and the optimization of energy structure. Overall, this study suggests that China set a high initial free-quota ratio and gradually decrease it to attain the emission reduction target while decreasing economic losses.

Suggested Citation

  • Wu, Qunli & Ma, Zhe & Meng, Fanxing, 2022. "Long-term impacts of carbon allowance allocation in China: An IC-DCGE model optimized by the hypothesis of imperfectly competitive market," Energy, Elsevier, vol. 241(C).
    • Handle: RePEc:eee:energy:v:241:y:2022:i:c:s036054422103156x
    DOI: 10.1016/j.energy.2021.122907
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