China’s Abatement Cost And Mitigation Policies:Some Contributions To The Development Of The CEEPA Model

Abatement costs are a critical factor affecting greenhouse gas reduction activities. In international climate change negotiations, considering national emission reduction costs all the countries debate on global emission reduction burden-sharing. With economic development and growth of energy consumption, the pressure to reduce greenhouse gas emission increases in China. The issues of emission reduction activities and mitigation policy in China have become one of the hotspots of the international policy to address climate change.Based on general equilibrium theory, taking into account the characteristics of China’s economic and energy market, and combining with the issues of abatement costs and emission reduction policy simulation, this study expands and complements China’s energy and environmental policy analysis model CEEPA developed by the Center of Energy and Environmental Policy Research in Beijing Institute of Technology and the author, the improved CEEPA model is used to analyze and discuss China’s carbon dioxide abatement costs, and carry out the simulation and analysis of the relevant emission reduction policies in order to provide scientific information to support for the emission reduction policies decision in China.Major contributions of this dissertation are as follows:(1) This study improved the basic CEEPA model (a CGE model for China’s energy and environmental policy analysis) by introducing a description of the current energy pricing mechanism in China. This improved model was applied to generate marginal abatement cost (MAC) curves for China under different energy pricing mechanisms, to simulate the impacts of an increase in international energy prices on MAC in China under different mechanisms, Considering that the prices of electricity, natural gas and refined oil are still regulated to some extent by the government with complex mechanisms and pricing reforms for electricity, natural gas and refined oil are imperative with the development of economy in China, five scenarios are set in this study including one baseline scenario and four pricing reform scenarios. Through comparing the different marginal abatement cost (MAC) curves for China under different energy pricing mechanisms, and the different impacts of international energy prices volatility on MAC in China under different mechanisms, the impacts of energy mechanism on MAC for China are shown. The results show that MACs in China are sensitive to pricing mechanisms for electricity and refined oil, and price liberalization of these two kinds of energy could lead to a decrease in MACs in China. The impacts of international prices volatility of different energy on MACs for China are very different, and the impacts of rising and declining international energy price are the symmetrical. Regardless of energy pricing reforms, an increase in the international crude oil price would decrease MACs and a decrease in the international crude oil price would increase MACs, whereas an increase in the international coal price would increase MACs in China and a decrease in the international coal price would decrease MACs in China. An increase in the international refined oil price would decrease MACs and a decrease in the international refined oil price would increase MACs only when the domestic refined oil price in China is deregulated. The impact of the international natural gas price volatility on MACs for China is weak.(2) This study applies the improved CEEPA model to analyze MACs for the main abatement sectors in China, and from the perspective of economy-wide cost-effective, this study aims to analyze how carbon mitigation burdens should be shared among key emission sectors in China, as well as how these sectors would behave to meet their burdens. In particular, this study takes into account the current characters and potential reforms of energy markets in China, to reveal their impacts on the mitigation behavior of each sector. This study finds that in general, allocating mitigation burdens based on historical emissions could realize the national target in a cost-effective way. However, some adjustments should be made to the coal, electricity and transportation sectors. The heavier the national burden, the greater share should be taken by transportation sector while the less share should be taken by coal sector. The mitigation targets for all sectors, especially for the coal sector, should not be set too high in the short term. From the perspective of economy-wide cost-effective, the burden shared by the electricity sector should increase if electricity pricing is deregulated; meanwhile, energy saving in the electricity sector should be promoted, and the energy input structure in this sector should be improved.(3) This study applies the China Energy and Environmental Policy Analysis model (CEEPA) to assess how the allowances should be allocated when China built the carbon emission trade system to achieve some given reduction targets. This study analyzes the above-mentioned three kinds of allocation methods (free allocation, non-gratuitous allocation and mixed mechanism) which are popular in current relevant discussions. Considering the different principles in allocating the permits to sectors and enterprises, and different ways to recycle the permits revenue, this study examines9allowance allocation approaches. Simulation results show that, while impacts on China’s economic development vary according to how allowances are allocated, the negative impacts cannot be mitigated completely. In terms of the impacts on the macro economy, sectoral output and capital revenue, results suggest that auctioning the allowances and recycling the revenue to reduce the indirect tax will perform best in alleviating the negative impacts. Meanwhile, impacts of carbon mitigation on international competitiveness can be reduced most in the approach where only key energy-and trade-intensive sectors are able to receive free allowances. However, if citizens’welfare and quality of life is prioritized, auctioning the allowance and transferring the revenue to households in proportion to their occupation will be the most effective approach; in this case the negative impacts on rural households’disposable incomes and welfare will be reduced and the income gap between rural and urban households will be narrowed.(4) Through describing the activities of R&D investment, knowledge capital allocation and its factor income distribution in CEEPA model, this study completes the modeling of endogenous technological progress in CEEPA. Technological progress can affect the input and use of energy, and carbon emissions, thereby affecting abatement costs and the effects and socio-economic costs of emission reduction policy. Technological progress is not automatic but needs investments and costs a certain amount. So the policies to promote technological progress can further affect investment and economic development, and energy consumption and carbon emissions. Applying the CEEPA model contains endogenous technical progress to explore the impacts of carbon trading market to achieve a certain emissions reduction targets on technological advances, as well as the impacts of technology policy (R&D subsidy policy) on technological advances, carbon emissions and economy. Under the framework of endogenous technological progress this study further analyzes the socio-economic costs caused by using carbon trading market to achieve a certain emission reduction targets, especially that R&D subsidy policy through the promotion of technological advances to make these social and economic costs changed. The results shows that technological progress can be induced by the carbon trading system representing emission reduction policies; the R&D subsidies policy can promote CO2reduction in the short term, while in long-term result in the increase of carbon emissions; the R&D subsidy policies can effectively alleviate the socio-economic cost of carbon trading, but has little effect on carbon market equilibrium price.This paper develops a CGE model to analyze abatement cost and simulate mitigation policy for China, which would strengthen the recognition of China’s abatement cost, and propose some scienetific information supports to policy-makers to design the mitigation policy strategy.