How can China achieve its nationally determined contribution targets combining emissions trading scheme and renewable energy policies?

Abstract

The adoption of emissions trading scheme (ETS) and renewable energy sources (RES) policies have been essential to achieving China's national targets for reducing CO2 emissions and developing non-fossil energy sources. The combination of ETS and RES policies raises an important issue: What is the effect of combining ETS and RES policies on the existing carbon market and economy? Focusing on the design of the nationwide carbon market, this paper uses a multi-regional computable general equilibrium (CGE) model to analyze the economic impacts of ETS policy when combined with RES policies in China. The results show that China's annual ETS emissions cap should decrease by 0.3% to maintain stable CO2 prices and achieve the targets in China's intended nationally determined contribution (INDC). It is estimated that the CO2 price on the nationwide carbon market would decrease by 11-64% when the renewable energy subsidy rate increases from 20 to 100%, and the total trading volume would decrease by 3-25%. The results also show that the combination of an ETS and a feed-in tariff (FIT) results in greater GDP cost and welfare loss in all Chinese regions, increasing the total social cost by 0.01-0.06%.