Power generators' emission reduction strategies under China's CEA and CCER schemes: A game-theoretic economic simulation

The dynamic economic effects of multi-mechanism carbon market designs on Chinese power generators' emission-reduction and supply-chain decisions remain underexplored. We develop profit-based models to study how technological abatement, China Emissions Allowance (CEA) trading, and Chinese Certified Emission Reduction (CCER) trading interact, and simulate their economic impacts on power producers. The analysis yields three main results. First, generation firms, especially those with a high share of clean electricity, are highly sensitive to the allocation benchmark and its annual decline rate. This underscores the importance of benchmark design for investment signals. Second, the profitability of coal-fired plants depends critically on collaboration costs with energy service companies (ESCOs). Lower collaboration costs favor coal-fired plants, whereas higher costs shift profits toward clean-energy producers and alter market structure. Third, tighter carbon market supervision promotes technological upgrading in clean-energy firms and can improve the profitability of coal-fired plants through more effective use of the CCER market. These results have implications for market design and firm strategy. We suggest adjusting allowance benchmarks dynamically with technological progress and setting CCER offset caps and substitution ratios that reflect firm characteristics. Coal-fired generators should invest in low-carbon technologies before entering the market at scale, while clean-energy producers benefit from early participation.