Does China emission trading scheme reduce marginal abatement cost? A perspective of allowance allocation alternatives

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2022-07-01

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Emission trading schemes (ETSs) are regarded as cost-effective environmental regulatory policies; however, because of the loose carbon allowances, it is up for debate whether China's carbon emission trading scheme (CETS) plays a cost-effective role in carbon emission reduction. This paper investigates how the marginal abatement cost (MAC) is changed by the China CETS from a perspective of alternative allowance allocation methods. The empirical strategy adopts the directional distance function and difference-in-difference (DID) analysis, coupled with the industry-by-province level data from 2008 to 2016. The roles of free-auction combined allowance allocation rules and free allocation in the MAC are explored. Furthermore, the heterogeneous effects of adopted free allocation in CETS, i.e., benchmarking (BENCH), emission-based grandfathering (EGRAND), and intensity-based grandfathering (IGRAND) on MAC of industries are investigated. The empirical findings disclose the following. First, China CETS results in an 8% decline in MAC for the regulated industrial sectors in pilot areas. Second, regulated industrial sectors allocated carbon allowances by free rule decrease their MAC by approximately 1%, while those allocated carbon allowances by free-auction combined rule increase their MAC by 11%. Meanwhile, of the free allocation alternatives, IGRAND causes a 24% increase in the MAC, while EGRAND and BENCH allocation methods lead to insignificant changes in the MAC for the regulated industrial sectors.

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10.1016/j.spc.2022.05.021

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Peng, HR, J Cui and X Zhang (2022). Does China emission trading scheme reduce marginal abatement cost? A perspective of allowance allocation alternatives. Sustainable Production and Consumption, 32. pp. 690–699. 10.1016/j.spc.2022.05.021 Retrieved from https://hdl.handle.net/10161/26567.

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Cui

Jingbo Cui

Associate Professor of Applied Economics at Duke Kunshan University

Bio: Dr. Jingbo Cui is an Associate Professor of Applied Economics at the Division of Social Sciences and Environmental Research Center at Duke Kunshan University. Before the current position, he was a Chu-Tian Junior Scholar from the Department of Education in Hubei Province, an associate professor at the School of Economics and Management at Wuhan University, a post-doctoral research associate, and visiting scholar at Iowa State University. He holds a Ph.D. in economics from Iowa State University, an M.S. in economics from Wuhan University, and a B.S. in economics and mathematics from Huazhong University of Science and Technology, China. Dr. Cui’s research centers on Environmental Economics, Economics of Innovation, and International Trade. His research has appeared in top academic journals in the fields of Environmental and Resource Economics and Energy Economics, such as Proceedings of the National Academy of Sciences (PNAS), American Economic Review Papers and ProceedingsJournal of Environmental Economics and ManagementAmerican Journal of Agricultural Economics, Environmental and Resource Economics, Journal of Regional Science, China Economic ReviewThe World Economy, Energy Economics, and Energy Policy. He has been serving as the referee for leading journals in Environmental Economics, Agricultural Economics, and Economics of Innovation (i.e., JEEM, AJAE, JAERE, Nature Climate Change, and Research Policy). His research projects have been funded by the National Natural Science Foundation of China (General Program, Junior Program, and Urgent Program), Jiangsu Qinglan Project, and Kunshan Municipal Fund.


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