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Thematic Session 1: China Carbon Market: Theory, Field Experiment, and Empirical Evidence
Organizers: Jingbo Cui (Duke Kunshan University) and Junjie Zhang (Duke University and Duke Kunshan University)
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| Session Abstract | ||
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China's Carbon Emission Trading Scheme (ETS) has completed its first decade, marking a significant transition from regional ETS pilots to a nationwide market, albeit limited to the power sector. Several fundamental questions remain unanswered: Whether and how does carbon ETS facilitate firms’ competitiveness? How can the allowance allocation rules in the nationwide market be improved to enable carbon market participation? How can we design the nationwide market to address the incomplete information on abatement costs and local externalities of abatement? Three papers presented in this thematic session comprehensively evaluate China's carbon market through empirical evidence, lab-in-the-field experiments, and theoretical modeling and simulation. Leveraging regional pilots as a quasi-natural experiment, paper one examines the causal impacts of ETS on firms’ innovation and competitiveness. This paper unravels a critical yet unexplored channel of how early climate innovators can gain a competitive advantage. Paper two explores how alternative allowance allocation rules could facilitate carbon market participation. This paper implements a lab-in-the-field experiment for three thousand industry practitioners through the Beijing Green Exchange training courses. On top of the policy design, the last paper discusses the trade-off in policy design between market and planning under incomplete information for carbon abatement costs and the local externality of abatement. | ||
| Presentations | ||
Carbon Price, Innovation, and Firm Competitiveness 1Duke Kunshan University; 2Duke University and Duke Kunshan University; 3London School of Economics and Political Science Using China's regional carbon market pilots as a natural experiment, we examine the impacts of the emission trading system (ETS) on firms' innovation and competitiveness. We show that the ETS directs innovation towards climate-friendly technologies; it increases the climate patent ratio by 2.1 percentage points, equivalent to a 20.5 percent increase in the total climate patent counts. We find no evidence that the ETS harms firms' profitability and productivity, partly due to the beneficial effect of climate innovation. We demonstrate early climate innovators can gain competitive advantages after the ETS launch. The climate patents accumulated before the ETS enable regulated firms to improve total factor productivity and financial performance. A wind tunnel test of alternative emissions trading schemes: A large-scale lab-in-the-field experiment from China 1Xiamen University, China, People's Republic of; 2Tsinghua University, China, People's Republic of We recruited more than three thousand industry practitioners through the Beijing Green Exchange training courses for a wind tunnel test of three emissions trading schemes—grandfathering (GF), uniform price auction (UPA), and revenue-neutral consignment auction (CA), implemented respectively in China, the European Union, and California. In a real world setting with heterogeneous agents to participate in primary and spot markets in the short run, we find that UPA and CA do not generate significantly different prices in either the primary or spot markets, but both provide price signals to the secondary market, inducing transaction prices in the secondary market not lower than observed auction clearing prices. Additionally, they induce higher prices in spot markets compared to GF which results in prices close to a nash bargaining solution. The price signals generated under auctions contribute to lower volatilities and more efficient spot market trading. UPA performs the best in reducing non-compliance, primarily by reducing both permit hoarding and risky over-selling in the spot market. CA generates significantly higher profits for large and cleaner firms. Our results provide valuable insights on permit allocation designs when introducing an ETS, especially for developing countries that are pondering the balance between market efficiency and firms’ cost burden. Market vs. Planning: Emission Abatement under Incomplete Information and with Local Externalities 1University of Hong Kong; 2Peking University; 3UC Riverside We revisit the classic “market vs. planning” debate in economic coordination in the context of achieving a pre-determined target of emission abatement, by comparing a Cap-and-Trade market versus an ex-ante optimal allocative plan of non-tradable permits. We show that the market can address incomplete information about the abatement cost, but not heterogeneous local externalities of abatement, while the opposite is true for planning, constituting a trade-off in policy design. Applying the theoretical results to China’s carbon abatement, we find that a hybrid scheme that combines subnational planning with segregated subnational markets can improve upon both the market- and planning-alone approaches. | ||