Designing an Emissions Trading Scheme for China – An Up-to-Date Climate Policy Assessment

We assess recent Chinese climate policy proposals in a multi-region, multi-sector computable general equilibrium model with a Chinese carbon emissions trading scheme (ETS). When the emissions intensity per GDP in 2020 is required to be 45% lower than in 2005, the model simulations indicate that the climate policy-induced welfare loss in 2020, measured as the level of GDP and welfare in 2020 under climate policy relative to their level under business-as-usual (BAU) in the same year, is about 1%. The Chinese welfare loss in 2020 slightly increases in the Chinese rate of economic growth in 2020. When keeping the emissions target fixed at the 2020 level after 2020 in absolute terms, the welfare loss will reach about 2% in 2030. If China’s annual economic growth rate is 0.5 percentage points higher (lower), the climate policy-induced welfare loss in 2030 will rise (decline) by about 0.5 percentage points. Full auctioning of carbon allowances results in very similar macroeconomic effects as free allocation, but full auctioning leads to higher reductions in output than free allocation for ETS sectors. Linking the Chinese to the European ETS and restricting the transfer volume to one third of the EU’s reduction effort creates at best a small benefit for China, yet with smaller sectoral output reductions than auctioning. These results highlight the importance of designing the Chinese ETS wisely