Rate-Based Emissions Trading with Overlapping Policies: Insights from Theory and an Application to China

45 Pages Posted: 2 Dec 2024 Last revised: 9 Dec 2024

See all articles by Carolyn Fischer

Carolyn Fischer

World Bank Group

Chenfei Qu

Tsinghua University

Lawrence H. Goulder

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

Date Written: November 2024

Abstract

Jurisdictions employing emissions trading systems (ETSs) to control emissions often utilize other environmental or energy policies as well, including policies to support renewable energy and reduce energy consumption. Interactions with these other policies lead to different outcomes from what might be predicted by examining the policies separately. The prior literature considering policy interactions has focused mainly on the case where the ETS is cap and trade. This paper extends the literature by examining the outcomes under a wide range of ETSs (including several forms of tradable performance standards) and overlapping policies (including various renewable subsidies and electricity consumption taxes). An analytical model demonstrates that the impacts of overlapping policies on allowance prices, emissions, and electricity output depend critically on the nature of the ETS. A numerical general equilibrium model tailored to China’s economy explores the implications for the cost-effectiveness of emissions reductions. Results indicate that overlapping policies that reduce cost-effectiveness under cap and trade can significantly enhance cost-effectiveness under tradable performance standards. The model predicts that under the current and planned designs for China’s ETS, which sets differentiated tradable performance standards for emitters, implementing renewable portfolio standards and accounting for indirect emissions from electricity consumption are both beneficial. Together they can reduce the cost of achieving the national emissions target by 20-30 percent over the interval 2020-2035. Transitioning to uniform benchmarks for emitting power generators could save another 10-15 percent. The findings highlight the importance of coordinating the designs of emissions trading systems with the overlapping policies.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Fischer, Carolyn and Qu, Chenfei and Goulder, Lawrence H., Rate-Based Emissions Trading with Overlapping Policies: Insights from Theory and an Application to China (November 2024). NBER Working Paper No. w33197, Available at SSRN: https://ssrn.com/abstract=5040537

Carolyn Fischer (Contact Author)

World Bank Group

10 Marina Boulevard
Marina Bay Financial Center, Tower 2, #34-02
Singapore, DC 018983
Singapore

Chenfei Qu

Tsinghua University ( email )

Beijing, 100084
China

Lawrence H. Goulder

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-723-3706 (Phone)
650-725-5702 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Resources for the Future

1616 P Street, NW
Washington, DC 20036
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3
Abstract Views
90
PlumX Metrics