Carbon Pricing Under Carbon Regulations:a Generalized Cost Function Approach

Carbon pricing is an important policy tool to achieve the carbon peak and carbon neutrality(hereafter as "double carbon" targets),and the marginal abatement cost(MAC)is a key economic parameter to measure the reasonableness of carbon pricing.In production economics,conventional approaches to the estimation of mitigation cost for CO2 typically assume that firms minimize production costs in response to market prices.However,the prevalence of environmental regulations could result in firms’ departure from their optimal input-output mixes and thus incurs additional costs.For this,this thesis develops a generalized cost framework,which is that firms base their production decisions on unobservable effective prices subjected to regulations,rather than on market prices.This thesis applies the methodology to a dataset of large thermal power producers in China from 2005 to 2015 to estimate the relative versus the absolute impact of environmental regulations on firms’production costs.The results indicate that(1)A 1%regulatory decrease in CO2 emissions increases production costs by 1.57%.(2)Carbon regulations triggered substantial substitution of capital for labor and energy.The estimated regulatory demand elasticities for capital,labor,and energy are-0.786,0.189,and 0.275,respectively.(3)Due to regulatory distortion,the average adjusted MAC for CO2 is 359 CNY/ton,significantly higher than those estimated by conventional frontier approaches using the same data.(4)The total cost of CO2 reduction in China’s power sector during the sample period was 1.14 CNY trillion,while the global social benefit of China’s carbon reduction was 8.50 CNY trillion,implying that China’s efforts to decarbonize practices in the power sector cost-effective.Based on the results of the analysis,policy recommendations are made:when implementing mandatory and market-based environmental regulations,a step-by-step approach should be taken to minimize the negative impacts of a "one-size-fits-all" approach and to sustain the "double carbon" targets and high-quality development.