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Synergistic Effects of Carbon Pricing and Power Market Reform on CO 2 Emissions Reduction in China's Electricity Sector

47 Pages Posted: 6 Jul 2021 Publication Status: Review Complete

See all articles by Mingquan Li

Mingquan Li

Beihang University - School of Economics and Management

Huiwen Gao

Beihang University - School of Economics and Management

Ahmed Abdulla

Carleton University - Department of Mechanical and Aerospace Engineering

Rui Shan

University of North Carolina (UNC) at Chapel Hill - Gillings School of Global Public Health; Oak Ridge National Laboratory

Shuo Gao

Rocky Mountain Institute - Beijing Representative Office

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Abstract

China is pursuing aggressive action to reduce greenhouse gas emissions from its coal-dominated electric power system. Two key strategies are power market reform and carbon pricing. This paper investigate the synergistic effects of these two strategies in reducing CO2 emissions from power system operations. We develop an economic dispatch model to simulate hourly power supply system operation in China Southern Power Grid in 2018 under fifteen carbon pricing scenarios; these reflect a wide range of policy ambition, from today’s carbon prices to much higher ones that aim to instigate aggressive emission mitigation. Our results show that moderate carbon pricing alone is insufficient to effectively reduce CO2 emissions without concurrent power sector reform. With power sector reform and as carbon prices increase, large coal units supplemented by energy storage witness higher use rates as they supplant smaller coal-fired generators, until a carbon price of 300 RMB/TCO2 phases out coal use in favor of natural gas. Only at carbon prices higher than 300 RMB/TCO2 do emissions begin to decrease appreciably. Geographic disparities emerge among the five provinces that comprise the Southern Power Grid, with Guangdong witnessing the most CO2 emission reduction at high carbon prices, while emissions reduction in other provinces are negligible. Carbon pricing also dramatically increases total power system costs, even at low carbon prices. Our results show the necessity of introducing power sector reform and carbon pricing policies concurrently if the goal is to reduce CO2 emissions, with the ultimate goal being a carbon price significantly greater than 300 RMB/TCO2. Because both options will be necessary, our research maps a path to deep emission reductions in China Southern Power Grid for investors, analysts, and policy makers as discussions regarding both reforms accelerate.

Keywords: Carbon pricing; Power market reform; Planned dispatch; Economic dispatch; China; CO2 emissions

Suggested Citation

Li, Mingquan and Gao, Huiwen and Abdulla, Ahmed and Shan, Rui and Gao, Shuo, Synergistic Effects of Carbon Pricing and Power Market Reform on CO 2 Emissions Reduction in China's Electricity Sector. Available at SSRN: https://ssrn.com/abstract=3881305 or http://dx.doi.org/10.2139/ssrn.3881305
This version of the paper has not been formally peer reviewed.

Mingquan Li (Contact Author)

Beihang University - School of Economics and Management ( email )

37 Xue Yuan Road
Beijing 100083
China

Huiwen Gao

Beihang University - School of Economics and Management ( email )

37 Xue Yuan Road
Beijing 100083
China

Ahmed Abdulla

Carleton University - Department of Mechanical and Aerospace Engineering

1125 colonel By Drive
Ottawa, K1S 5B6
Canada

Rui Shan

University of North Carolina (UNC) at Chapel Hill - Gillings School of Global Public Health ( email )

Chapel Hill, NC 27599
United States

Oak Ridge National Laboratory ( email )

PO Box 2008
Mail Stop 6037
Oak Ridge, TN 37831-6037
United States

Shuo Gao

Rocky Mountain Institute - Beijing Representative Office ( email )

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