Impact of emission reduction policies under the tradable performance standards

The Tradable Performance Standards (TPS) is an intensity-based emissions trading system, whereas the Renewable Portfolio Standard (RPS) is a distinct renewable energy mandate. Both instruments support carbon neutrality. The necessity of overlapping policies remains debated because additional regulation can elevate compliance costs. Using theoretical and numerical approaches, we examine how these two mandates interact in China’s electricity market. We show that the TPS reduces emissions intensity while creating an implicit output subsidy that encourages thermal overproduction and lowers electricity prices. Adding the RPS curbs thermal output, expands green generation, and improves fuel-use efficiency, while leaving the intensive-margin emissions intensity unchanged in the baseline representative-firm equilibrium. Welfare effects are non-monotonic in quota stringency, as moderate quotas correct the TPS output distortion whereas overly ambitious quotas generate high certificate costs. Benchmark-sensitivity analysis confirms that the primary mechanism remains robust under China’s subsequent benchmark tightening. These findings suggest that overlapping TPS–RPS policies can be welfare improving when renewable quotas are carefully calibrated and supported by certificate-price safeguards.