Modeling Carbon Emission Allowance Trading in China’s ETS

11 Pages Posted: 19 Mar 2021

See all articles by Hongjun wu

Hongjun wu

Xiamen University

Lingju Chen

affiliation not provided to SSRN

Qingliang Tang

Western Sydney University - School of Business

Date Written: February 15, 2021

Abstract

This paper develops a game model to depict the process of determining the trading price and volume at equilibrium of Chinese carbon emission allowance trading market. Assuming that the cost for carbon emission reduction is a normally distributed random variable, enterprises are risk-neutral, and the total quantity of emissions allowances for the whole carbon market is a given, exogenous variable, carbon emission allowance price is a linear function, the model shows that CO2 price and volume are both affected by the magnitude and variance in the carbon reduction costs borne by companies and the reduction targets of the government. More specifically, the ratio between variances in costs and in reduction targets is associated with the speed of changes in CO2 price and rate of change in CO2 volume. This theoretical model should enhance our understanding of the mechanism of carbon trading price and volume of cap-and-trade system.

Keywords: Emission allowance price, Emission allowance trading volume, Emissions trading scheme in China

JEL Classification: Q54, C70, G12

Suggested Citation

wu, Austin and Chen, Lingju and Tang, Qingliang, Modeling Carbon Emission Allowance Trading in China’s ETS (February 15, 2021). Available at SSRN: https://ssrn.com/abstract=3785700 or http://dx.doi.org/10.2139/ssrn.3785700

Austin Wu (Contact Author)

Xiamen University ( email )

Xiamen, Fujian 361005
China

Lingju Chen

affiliation not provided to SSRN

Qingliang Tang

Western Sydney University - School of Business ( email )

Locked Bag 1797
Penrith, NSW 2751
Australia

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