Achieving carbon reductions in the chinese economy: an examination of policy options

As the world largest carbon dioxide (CO2) emitter, China is under pressure to develop policies to mitigate carbon emissions, with market-based approaches under consideration. Emissions trading is theoretically the most efficient approach but some countries are starting with carbon/energy taxes. This research examines these two options through literature and practice in order to evaluate which might be most suitable for China and then to estimate the major economic impacts of the selected option. The thesis first looks at the limited cases of emissions trading, with a particular focus, using official reports and data and interviews, on the example of SO2 control in Taiyuan city. It is found that the Taiyuan SO2 emissions trading program does not seem to be functioning anything like the ideal emissions trading model and cannot be judged as a successful scheme in terms of emissions reductions, cost savings, innovation and investment in clean energy, and investment leakage. When combined with concerns about the limited development of truly free markets and the weak law basis in China, it is concluded that emissions trading may not be the best policy option at this stage and that a carbon tax might be the most practical interim measure. Next, the impacts of a carbon tax are considered through a computable general equilibrium (CGE) model for China. The simulation results show that overall the introduction of a carbon tax will have a negative impact on the economy, but this negative impact is relatively gentle if considered against the emissions reductions. After a carbon tax is imposed, carbon intensive sectors will suffer most seriously and there will be a shift away from high-carbon factors toward low-carbon or non-carbon factors. Moreover, the adverse effects of the tax on economy could be relieved to some extent by subsidizing households, through transfers of the tax revenue. From the experience of Australia, China could also use carbon tax as a transitional policy and then move to carbon emissions trading system when the market mechanism becomes mature.