Modeling the cost transmission mechanism of the emission trading scheme in China

The national emission trading scheme (ETS) in China, CHN-ETS, was established in 2017 following the start of its regional pilot markets in 2013. It will start with a coverage of electricity supply sector and eight pilot regions. Due to a highly regulated dispatch and pricing system in the electricity supply sector, the additional emission abatement costs brought by the ETS cannot be automatically conveyed between consumers and producers in all regions. This paper modeled the cost transmission of ETS in three scenarios based on the quantification results of regional and sectoral emission flows in the electricity supply sector under consumption-based accounting. The results show that the emissions transferred into pilot cities outweighed the emissions transferred out, not only through direct electricity uses but also through the indirect emissions embodied in other sectors that required intermediate inputs from electricity supply sectors in the pilot cities. Through the cost transmission mechanism, the additional abatement cost caused by the national ETS drove the increases in the household consumption of several energy-intensive sectors, including the metal mining sector in Hebei, the petroleum and gas sector in Heilongjiang, and the nonmetal mining sector in Sichuan, with a sensitive increase of 10.1%, 9.9%, and 3.5%, respectively. However, most sectors (745 of the 810) would suffer an increase rate below 0.1%. As long as the household welfare would be ensured, there is still room for the current average market price in the pilot cities to be further increased toward the official guidance price in the nation-wide market.