Pricing Carbon Emissions in China

Tinbergen Institute Discussion Paper 2018-001/III

58 Pages Posted: 17 Jan 2018

See all articles by Chia-Lin Chang

Chia-Lin Chang

National Chung Hsing University - Department of Applied Economics, Department of Finance

Te-Ke Mai

National Tsing Hua University

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Date Written: January 10, 2018

Abstract

The purpose of the paper is to provide a clear mechanism for determining carbon emissions pricing in China as a guide to how carbon emissions might be mitigated to reduce fossil fuel pollution. The Chinese Government has promoted the development of clean energy, including hydroelectric power, wind power, and solar energy generation. In order to involve companies in carbon emissions control, a series of regional and provincial carbon markets have been established since 2013. Since China’s carbon market was established in 2013 and mainly run domestically, and not necessarily using market principles, there has been almost no research on China’s carbon price and volatility. This paper provides an introduction to China’s regional and provincial carbon markets, proposes how to establish a national market for pricing carbon emissions, discusses how and when these markets might be established, how they might perform, and the subsequent prices for China’s regional and national carbon markets. Power generation in manufacturing consumes more than other industries, with more than 40% of total coal consumption. Apart from manufacturing, the northern China heating system also relies on fossil fuels, mainly coal, which causes serious pollution. In order to understand the regional markets well, it is necessary to analyze the energy structure in these regions. Coal is the primary energy source in China, so that provinces that rely heavily on coal receive a greater number of carbon emissions permits from the Chinese Government. In order to establish a national carbon market for China, a detailed analysis of eight important regional markets will be presented. The four largest energy markets, namely Guangdong, Shanghai, Shenzhen and Hubei, traded around 82% of the total volume and 85% of the total value of the seven markets in 2017, as the industry structure of the western area is different from that of the eastern area. The China National Development and Reform Commission has proposed a national carbon market, which can attract investors and companies to participate in carbon emissions trading. This important issue will be investigated in the paper.

Keywords: Pricing Chinese Carbon Emissions, National Pricing Policy, Energy, Volatility, Energy Finance, Provincial Decisions

JEL Classification: C22, C58, G12, Q35, Q48

Suggested Citation

Chang, Chia-Lin and Mai, Te-Ke and McAleer, Michael, Pricing Carbon Emissions in China (January 10, 2018). Tinbergen Institute Discussion Paper 2018-001/III, Available at SSRN: https://ssrn.com/abstract=3100164 or http://dx.doi.org/10.2139/ssrn.3100164

Chia-Lin Chang (Contact Author)

National Chung Hsing University - Department of Applied Economics, Department of Finance ( email )

Taichung, Taiwan
China

Te-Ke Mai

National Tsing Hua University ( email )

No. 101, Section 2, Guangfu Road, East District
Hsin Chu 3, 300
China

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )

Rotterdam
Netherlands

Tinbergen Institute

Rotterdam
Netherlands

University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Tokyo
Japan

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