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The Economic Effects of Initial Quota Allocations on Carbon Emissions Trading in China

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Abstract:
The emissions trading scheme has recently become an important emissions reduction mechanism in China. The initial quota allocation is one of the key points in its design, which includes the initial quota allocation criterion and allocation method. In this paper, we analyze the regional macroeconomic impacts of emissions trading in China under different quota allocation criteria and allocation methods using a multiregional computable general equilibrium (CGE) model. The results show that the Ability-to-Pay criterion is better than the other criteria, as it can lead to fewer macroeconomic costs and welfare losses; narrow the economic gap between the eastern, central and western regions; and guide investment into the western regions. Comparing free allocation and auction, it is determined that free allocation leads to lower macroeconomic costs, while auction is better at adjusting the industrial structure. This indicates that a hybrid allocation method is preferable.

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Keywords: Initial quota allocation, Criterion, Methods, CGE, Macroeconomic cost

DOI: 10.5547/01956574.37.SI1.jwu

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Published in Volume 37, China Special Issue of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.