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Climate policy and China's external balances

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  • Zheng, Shuang
  • Liu, Xiaohui
  • Gu, Yue

Abstract

To explore the impact of the China Carbon Emissions Trading Exchange (CCETE) on international trade and capital flow, we develop a two-country dynamic general equilibrium model with asymmetric climate policies. We use targets of decreasing carbon emissions intensity to simulate the strengthening of the CCETE policy. We find that the strengthening of climate policy improves China's trade balance and current account. We also find that output and carbon emissions of the rest of the world with a less stringent climate policy increase (known as carbon leakage) in the short run, but decrease (known as positive externalities of climate policy) in the long run. These findings suggest that China could benefit from more stringent climate policy due to the improvement of its external balances, and the world could also benefit due to the mitigation of climate change.

Suggested Citation

  • Zheng, Shuang & Liu, Xiaohui & Gu, Yue, 2024. "Climate policy and China's external balances," Emerging Markets Review, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:ememar:v:63:y:2024:i:c:s1566014124001110
    DOI: 10.1016/j.ememar.2024.101216
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    Keywords

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    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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