Effectiveness and risk of initial carbon quota allocation principle under the uncertainty of the Chinese electricity market

Wang Zhaohua, Li Jingyun, Lu Bin, Wang Bo, Zhang Bin, Sun Kaining and Fan Mao

China Economic Review, 2023, vol. 77, issue C

Abstract: The carbon market's effectiveness in deep decarburization and energy transition has been widely proven. However, as other industries join the carbon market in China, the uncertainty and impact of it on the power industry are still under explored. Here, we define the industry-wide scenarios which power industry might confront in the carbon market. Then, we compare its economic output, market activity and environmental impact under initial carbon quota allocation principles based on efficiency and grandfather methods by the comprehensive evaluation model of energy and carbon markets combined with inverse DEA method. Our results show that when the power industry is in an advantageous position, the efficiency method is fairer and more efficient than the grandfather method. The potential economic output rate has more than doubled compared to that of the grandfather method. Market activity and emission reduction potential are 7% and 25% more than that in the grandfather principle, respectively. Nevertheless, when the power industry is in a disadvantageous position, the efficiency method leads to an imbalance between power supply and demand in the market and power shortages in 19 regions. Then the trading activity of the power market drops by 12%, resulting in serious economic loss, especially in China's eastern region (−7.29%). The economic risk caused by the grandfather method has been significantly reduced than that of the efficiency method. And there may be greater potential risks under the efficiency method. This study identifies the potential challenges and obstacles of future carbon market and addresses the urgency of policy to tackle this issue to facilitate a carbon market that operates robustly under uncertainty.

Keywords: CO2 quota allocation; Market uncertainty; Allocation principle; Equity and efficiency (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:77:y:2023:i:c:s1043951x2200150x

DOI: 10.1016/j.chieco.2022.101892

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