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

Abstract

China is pursuing 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 combined 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 market reform. With power market 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.