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intended output such as electricity), while China’s higher-cost TPS offers some
C&T imposes limits on the absolute volume of advantages. Although less cost-effective
emissions. These differences have important than C&T, the TPS has offsetting attractions.
implications for the costs of achieving emissions Compared to C&T, the TPS leads to smaller
reductions and for the ways that these costs are increases in output prices in the covered sectors.
distributed across regulated firms. This mitigates the shifts in demand toward other
Under both systems, a covered facility can achieve sectors and the "emissions leakage" that can
compliance by utilizing some combination of result from higher output in those sectors.
three channels: 1) reducing emissions intensities;
2) reducing intended output (e.g., electricity); and Comparing the costs of the TPS and C&T in reaching
3) purchasing emissions allowances from other emissions reductions.
facilities. The third channel expands a facility's
allowance ownership beyond the number initially A second attraction is that the TPS’s stringency
granted to the facility by the government. adjusts in response to the broader economic
environment. For instance, when the economy is
The incentives to reduce emissions through booming and demand for electricity is relatively
reduced intended output are much weaker under high, the expanded output entitles firms to a
the TPS than under C&T because the number of larger number of emission allowances, since
emissions allowances offered to the firm by the allowance allocations are a function of output.
government declines proportionately with the C&T programs do not have this attribute.
scale of output. In contrast, under C&T, reducing A third attraction relates to how the costs of the
TPS and C&T are distributed. Because producers
Differing channels for reaching an emission- under the TPS make less use of output reduction
reduction target. as a means of reducing emissions, the supply
of electricity is higher and electricity prices do
output does not prompt a similar reduction of not rise as much as they would under C&T. As a
allowances. Consequently, compared with C&T, result, the share of the overall cost burden borne
covered facilities under the TPS rely less on by consumers is smaller under the TPS than
output reduction and more on the other channels under C&T.
to reduce emissions. Environmental benefits of the TPS likely
outweigh the higher costs. Despite higher
China’s emissions trading system less aggregate costs, the TPS can generate significant
cost effective than C&T. The TPS’s weaker net gains once environmental benefits are
incentives for achieving emissions reductions counted. A central finding in the analysis is that
through reductions in intended output underlie the TPS’s benefits in terms of avoided climate
its disadvantage in terms of cost-effectiveness. damages are several times the policy cost when
The TPS’s extra reliance on reductions in CO2 emissions reductions are valued at 290
emissions intensity, in particular, is excessive RMB (44 $US) per ton. In addition to reducing
from the perspective of economic efficiency. A CO2 emissions, the TPS will yield lower emissions
central estimate from this research is that the of local air pollutants correlated with CO2.
overall economic cost of the first phase of the TPS Accounting for the reductions in air pollution
is about a third higher than that of a C&T system and associated health benefits would raise the
with the same coverage. benefit-cost ratio considerably.
SOUTH CHINA BUSINESS JOURNAL 30
C&T imposes limits on the absolute volume of advantages. Although less cost-effective
emissions. These differences have important than C&T, the TPS has offsetting attractions.
implications for the costs of achieving emissions Compared to C&T, the TPS leads to smaller
reductions and for the ways that these costs are increases in output prices in the covered sectors.
distributed across regulated firms. This mitigates the shifts in demand toward other
Under both systems, a covered facility can achieve sectors and the "emissions leakage" that can
compliance by utilizing some combination of result from higher output in those sectors.
three channels: 1) reducing emissions intensities;
2) reducing intended output (e.g., electricity); and Comparing the costs of the TPS and C&T in reaching
3) purchasing emissions allowances from other emissions reductions.
facilities. The third channel expands a facility's
allowance ownership beyond the number initially A second attraction is that the TPS’s stringency
granted to the facility by the government. adjusts in response to the broader economic
environment. For instance, when the economy is
The incentives to reduce emissions through booming and demand for electricity is relatively
reduced intended output are much weaker under high, the expanded output entitles firms to a
the TPS than under C&T because the number of larger number of emission allowances, since
emissions allowances offered to the firm by the allowance allocations are a function of output.
government declines proportionately with the C&T programs do not have this attribute.
scale of output. In contrast, under C&T, reducing A third attraction relates to how the costs of the
TPS and C&T are distributed. Because producers
Differing channels for reaching an emission- under the TPS make less use of output reduction
reduction target. as a means of reducing emissions, the supply
of electricity is higher and electricity prices do
output does not prompt a similar reduction of not rise as much as they would under C&T. As a
allowances. Consequently, compared with C&T, result, the share of the overall cost burden borne
covered facilities under the TPS rely less on by consumers is smaller under the TPS than
output reduction and more on the other channels under C&T.
to reduce emissions. Environmental benefits of the TPS likely
outweigh the higher costs. Despite higher
China’s emissions trading system less aggregate costs, the TPS can generate significant
cost effective than C&T. The TPS’s weaker net gains once environmental benefits are
incentives for achieving emissions reductions counted. A central finding in the analysis is that
through reductions in intended output underlie the TPS’s benefits in terms of avoided climate
its disadvantage in terms of cost-effectiveness. damages are several times the policy cost when
The TPS’s extra reliance on reductions in CO2 emissions reductions are valued at 290
emissions intensity, in particular, is excessive RMB (44 $US) per ton. In addition to reducing
from the perspective of economic efficiency. A CO2 emissions, the TPS will yield lower emissions
central estimate from this research is that the of local air pollutants correlated with CO2.
overall economic cost of the first phase of the TPS Accounting for the reductions in air pollution
is about a third higher than that of a C&T system and associated health benefits would raise the
with the same coverage. benefit-cost ratio considerably.
SOUTH CHINA BUSINESS JOURNAL 30
