Research On Emission Reduction Effects Of Carbon Tax And Carbon Trade

Both Carbon taxes and Carbon trade can lead to the efficient use of energy in productions,so as to control carbon emissions to the extent which is efficient with existing technologies.However, the regulatory policy has a second role, that is to encourage the research anddevelopment of lower-carbon technologies. With both roles and the assumption of fullydiffused technology in mind, is one of the policies better than the other?The answer depends partly on the price elasticity of demand, in other words, whether theprice of energy based production is in the elastic or inelastic part of the demand curve. It alsodepends on the size of the intended emission improvement. Addressing this question in atechnology switching model, the answer (under mild conditions) is that, for both policies,carbon emission directly depends on the output and the carbon emission rate per unit of theoutput, and that the licensing revenue of the innovator is a regular fraction of the total profit inthe energy market, where the fraction equals to the technology’s reduction rate of the carbonemission.With an accelerated development of urbanization and industrialization in China, the lackof elasticity of energy demand, and the high degree of correlation between output and energyconsumption imply that, the carbon emission under carbon tax regulation is less than the oneunder carbon trade regulation, that for the innovator emissions tax is more profitable thancarbon trade when the policies are fixed, that an adjustment for static efficiency reduceslicensing revenue in the taxation regime, but increases licensing revenue in the trade regime,and that the profits are the same when the two policies are adjusted for static efficiency.Under fixed carbon tax regulation, the licensing revenue can always benefit the innovatoreven if the new technology is diffused to all producers. This do not happen under carbon traderegulation, where supply expands because the technology diffusion reduces the price of outputand of emission allowances, and the producers may pay for carbon allowances instead oflicenses. Under carbon trade regulation, the incentive to invest in a larger improvement is littlebecause the technology is not profitable once it is fully diffused, no matter how large theimprovement it will bring, while under carbon tax nothing can erode the licensing revenues orthe incentive to innovate, so there is a better effect on carbon emission reduction.