China’s Nationwide CO2 Emissions Trading System: A General Equilibrium Assessment

China’s recently launched CO2 emissions trading system, already the world’s largest, aims to contribute importantly to global reductions in greenhouse gas emissions. The system, a tradable performance standard (TPS), differs importantly from cap and trade (C&T), the principal approach used in other countries. We offer a dynamic general equilibrium assessment of this new venture, employing a model that uniquely considers institutional and fiscal features of China’s economy that influence economy-wide policy costs and distributional impacts.Key findings include the following. The TPS’s environmental benefits exceed its costs by a factor of five when only the climate benefits are considered and by a significantly higher factor when health benefits from improved air quality are included. Its interactions with China’s fiscal system substantially affect its costs relative to those of C&T. Employing a single benchmark for the electricity sector would lower costs by over a third relative to the existing four-benchmark system but increase the standard deviation of percentage income losses across provinces by more than 60 percent. Introducing an auction as a complementary source of allowance supply can lower economywide costs by at least 30 percent.