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Efficiency vs. equity as China's national carbon market meets provincial electricity markets

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  • Cui, Jian
  • Song, Feng
  • Jiang, Zhigao

Abstract

Emissions reduction in the electricity sector is critical in achieving China's carbon neutrality target. While a national carbon trading market that covers the electricity sector has been established, its effectiveness depends on how this sector evolves into being a more integrated market. This study evaluated the impact of China's electricity market integration on the cost-effectiveness of carbon pricing. An integrated (regional electricity market) and a segmented (provincial electricity market) market scenario were used to identify possible reform paths going forward. Using high-frequency datasets of the five southern provinces in 2018, we assessed the impact of electricity market integration on the abatement potential and cost-effectiveness of carbon pricing. We found that carbon prices need to be as high as 200 yuan/ton to begin achieving overall carbon reduction. In this context, the regional market is more cost-effective in reducing emissions than the provincial one, as the abatement costs are saved by around 60% compared to the latter under the same emission reduction targets. However, the regional market may also raise potential equity issues. The provincial-level distribution of carbon emission reductions, as well as the withdrawal of coal power, are more concentrated in the regional market than in the provincial one, which indicates an inequitable social-economic-environmental impacts of market integration. Our research findings would help to improve policymakers' understanding of the interaction between carbon pricing and electricity market reforms. This would then assist them in coordinating an effective design of both the carbon and electricity markets, in addition to supporting China's carbon neutrality target.

Suggested Citation

  • Cui, Jian & Song, Feng & Jiang, Zhigao, 2023. "Efficiency vs. equity as China's national carbon market meets provincial electricity markets," China Economic Review, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:chieco:v:78:y:2023:i:c:s1043951x22001730
    DOI: 10.1016/j.chieco.2022.101915
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    More about this item

    Keywords

    Electricity market reform; Carbon market; Market integration; Carbon emissions; Equity and efficiency;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • P21 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Planning, Coordination, and Reform
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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