“Co-benefits†of Greenhouse Gas Mitigation Policies in China: An Integrated Top-Down and Bottom-Up Modeling Analysis

Many greenhouse gas mitigation policies that shift fossil fuel use are accompanied by some hidden environmental benefits, so called “co-benefits†or “ancillary benefits.†Since these “co-benefits†are often overlooked by government policy makers, there tends to be a bias in the policy analysis of various environmental policies and government strategies on global warming. To achieve a plausible estimate of the magnitude of these co-benefits of potential carbon reduction policies in China, this paper applied an integrated modeling approach by combining a top-down recursive dynamic CGE (computable general equilibrium) model with a bottom-up electricity sector model, to simulate three macro-level environmental tax policies: output tax, fuel tax, and carbon tax, as well as national-sectoral mixed policies (a national tax policy with emission caps in the electricity sector). Based on the integrated model simulations, the estimated ancillary health benefits from the three taxes are quite significant. Under the revenue neutrality condition, it is very likely that China would obtain a “win-win†solution with respect to carbon mitigation, especially if these co-benefits are included in the policy-making cost-benefit analysis. The integrated modeling approach also provides a useful way to examine a complicated mixed policy, such as a national tax policy combined with sectoral-level emission cap policies. In order to achieve both objectives regarding local co-benefits and induce technology change, this model suggests that the preferred policy for China is either a national level fuel tax or carbon tax imposed at the national level with carbon emission caps in the electricity sector.