Institutions and Emissions Trading in China

Institutions—the formal rules and informal norms that shape human interaction ( North 1991 )—have the potential to influence the oper - ation of an emissions trading system ( ETS ). For instance, preexisting economic regulation has been shown to affect firms’ abatement decisions and costs (Fowlie 2010). Transaction costs can also interfere with cost-effective operation by reducing trading levels and increasing abatement costs (Stavins 1995). As China develops a national ETS for carbon dioxide (CO₂) covering multiple energy-intensive sectors, it is important to consider how its design will interact with prevailing institutional features of the country’s economy. This paper focuses specifically on the role of state control of industry, one source of heterogeneity that will affect efforts to establish an ETS in China’s vast and diverse economic system

Prospects for Plug-in Hybrid Electric Vehicles in the United States and Japan: A General Equilibrium Analysis

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/)The plug-in hybrid electric vehicle (PHEV) may offer a potential near term, low carbon alternative to today's gasoline- and diesel-powered vehicles. A representative vehicle technology that runs on electricity in addition to conventional fuels was introduced into the MIT Emissions Prediction and Policy Analysis (EPPA) model as a perfect substitute for internal combustion engine (ICE-only) vehicles in two likely early-adopting markets, the United States and Japan. We investigate the effect of relative vehicle cost and all-electric range on the timing of PHEV market entry in the presence and absence of an advanced cellulosic biofuels technology and a strong (450ppm) economy-wide carbon constraint. Vehicle cost could be a significant barrier to PHEV entry unless fairly aggressive goals for reducing battery costs are met. If a low cost vehicle is available we find that the PHEV has the potential to reduce CO2 emissions, refined oil demand, and under a carbon policy the required CO2 price in both the United States and Japan. The emissions reduction potential of PHEV adoption depends on the carbon intensity of electric power generation and the size of the vehicle fleet. Thus, the technology is much more effective in reducing CO2 emissions if adoption occurs under an economy-wide cap and trade system that also encourages low-carbon electricity generation.BP Conversion Research Project and the MIT Joint Program on the Science and Policy of Global Change through a consortium of industrial sponsors and Federal grants

The Economic, Energy, and GHG Emissions Impacts of Proposed 2017–2025 Vehicle Fuel Economy Standards in the United States

Increases in the U.S. Corporate Average Fuel Economy (CAFE) Standards for 2017 to 2025 model year light-duty vehicles are currently under consideration. This analysis uses an economy-wide model with detail in the passenger vehicle fleet to evaluate the economic, energy use, and greenhouse gas (GHG) emissions impacts associated with year-on-year increases in new vehicle fuel economy targets of 3%, 4%, 5%, or 6%, which correspond to the initially proposed rates of increase for the 2017 to 2025 CAFE rulemaking. We find that across the range of targets proposed, the average welfare cost of a policy constraint increases non-linearly with target stringency, because the policy targets proposed require increasingly costly changes to vehicles in the near term. Further, we show that the economic and GHG emissions impacts of combining a fuel tax with fuel economy standards could be positive or negative, depending on underlying technology costs. We find that over the period 2015 to 2030, a 5% CAFE policy would reduce gasoline use by about 25 billion gallons per year, reduce CO2 emissions by approximately 190 million metric tons per year, and cost $25 billion per year (net present value in 2004 USD), relative to a No Policy baseline.The Integrated Global System Model (IGSM) and its economic component, the MIT Emissions Predictions and Policy Analysis (EPPA) model, used in this analysis is supported by a consortium of government, industry, and foundation sponsors of the MIT Joint Program on the Science and Policy of Global Change. (For a complete list of sponsors, see: http://globalchange.mit.edu

Markets versus Regulation: The Efficiency and Distributional Impacts of U.S. Climate Policy Proposals

Regulatory measures have proven the favored approach to climate change mitigation in the U.S., while market-based policies have gained little traction. Using a model that resolves the U.S. economy by region, income category, and sector-specific technology deployment opportunities, this paper studies the magnitude and distribution of economic impacts under regulatory versus market-based approaches. We quantify heterogeneity in the national response to regulatory policies, including a fuel economy standard and a clean or renewable electricity standard, and compare these to a cap-and-trade system targeting carbon dioxide or all greenhouse gases. We find that the regulatory policies substantially exceed the cost of a cap-and-trade system at the national level. We further show that the regulatory policies yield large cost disparities across regions and income groups, which are exaggerated by the difficulty of implementing revenue recycling provisions under regulatory policy designs.Massachusetts Institute of Technology. Joint Program on the Science & Policy of Global ChangeMIT Energy InitiativeUnited States. Dept. of Energy (Integrated Assessment Grant DE-FG02-94ER61937

Equity and emissions trading in China

China has embarked on an ambitious pathway for establishing a national carbon market in the next 5–10 years. In this study, we analyze the distributional aspects of a Chinese emissions-trading scheme from ethical, economic, and stated-preference perspectives. We focus on the role of emissions permit allocation and first show how specific equity principles can be incorporated into the design of potential allocation schemes. We then assess the economic and distributional impacts of those allocation schemes using a computable general equilibrium model with regional detail for the Chinese economy. Finally, we conduct a survey among Chinese climate-policy experts on the basis of the simulated model impacts. The survey participants indicate a relative preference for allocation schemes that put less emissions-reduction burden on the western provinces, a medium burden on the central provinces, and a high burden on the eastern provinces. Most participants show strong support for allocating emissions permits based on consumption-based emissions responsibilities.China. Ministry of Science and Technology (Grant No. 2012BAC20B07)Rio Tinto (Group

Quantifying Regional Economic Impacts of CO2 Intensity Targets in China

To address rising energy use and CO2 emissions, China’s leadership has enacted energy and CO2 intensity targets under the Twelfth Five-Year Plan (2011–2015), which are defined at both the national and provincial levels. We develop a computable general equilibrium (CGE) model with global coverage that disaggregates China’s 30 provinces and includes energy system detail, and apply it to assess the impact of provincial CO2 emissions intensity targets. We compare the impact of the provincial targets approach to a single national target for China that achieves the same reduction in CO2 emissions intensity at the national level. We find that at the national level, the national target results in 25% lower welfare loss relative to the provincial targets approach. Given that the regional distribution of impacts has been an important consideration in the target-setting process, we focus on the changes in provincial level CO2 emissions intensity, CO2 emissions, energy consumption, and economic welfare. We observe significant heterogeneity across provinces in terms of the energy system response as well as the magnitude and sometimes sign of welfare impacts. We further model the current policy of fixed end-use electricity prices in China and find that national welfare losses increase. Assumptions about capital mobility have a substantial impact on national welfare loss, while assumptions about natural gas resource potential does not have a large effect.We acknowledge the support of the Ministry of Science and Technology of China through the Institute for Energy, Environment, and Economy at Tsinghua University, and the support from Graduate School of Tsinghua University, which is supporting Zhang Da’s doctoral research as a 22 visiting scholar at the Massachusetts Institute of Technology. We are also grateful for the support provided by Rio Tinto China and Social Science Key Research Program from National Social Science Foundation, China of Grant no. 09&ZD029. We further acknowledge the support of Eni S.p.A., ICF International, and Shell, founding sponsors of the China Energy and Climate Project, for supporting this model development work. We would further like to thank Dr. John Reilly, Dr. Sergey Paltsev, Dr. Kyung-min Nam, Dr. Henry Chen, Paul Kishimoto and Tianyu Qi at Joint Program on the Science and Policy of Global Change, and participants in the annual meeting of China Energy and Climate Project and EcoMod 2012 Conference for helpful comments and discussion. 2

The Energy and Economic Impacts of Expanding International Emissions Trading

Emissions trading systems are recognized as a cost-effective way to facilitate emissions abatement and are expected to play an important role in international cooperation for global climate mitigation. Starting from the planned linkage of the European Union’s Emissions Trading System with a new system in Australia in 2015, this paper simulates the impacts of expanding this international emissions market to include China and the US, which are respectively the largest and second largest carbon dioxide (CO2) emitters in the world. We find that including China and the US significantly impacts the price and the quantity of permits traded internationally. China exports emissions rights while other regions import permits. When China joins the EU-Australia/New Zealand (EU-ANZ) linked market, we find that the prevailing global carbon market price falls significantly, from $33 per ton of carbon dioxide (tCO2) to$11.2/tCO2. By contrast, adding the US to the EU-ANZ market increases the price to $46.1/tCO2. If both China and the US join the linked market, the market price of an emissions permit is$17.5/tCO2 and 608 million metric tons (mmt) are traded, compared to 93 mmt in the EU-ANZ scenario. The US and Australia would transfer, respectively, 55% and 78% of their domestic reduction burden to China (and a small amount to the EU) in return for a total transfer payment of $10.6 billion. International trading of emissions permits also leads to a redistribution of renewable energy production. When permit trading between all regions is considered, relative to when all carbon markets operate in isolation, renewable energy in China expands by more than 20% and shrinks by 48% and 90% in, respectively, the US and Australia-New Zealand. In all scenarios, global emissions are reduced by around 5% relative to a case without climate policies.The authors are grateful for the support provided by the National Key Technology R&D Program from Ministry of Science and Technology of Grant NO. 2012BAC20B07. We acknowledge the support of the National Key Technology R&D Program and the Institute for Energy, Environment, and Economy at Tsinghua University, which is supporting Tianyu Qi’s doctoral research as a visiting scholar at the Massachusetts Institute of Technology. We acknowledge the support of ENI, ICF and Shell, initial Founding sponsors of the China Energy and Climate Project. This consortium of sponsors has provided support for researchers in the MIT Joint Program to engage in a five-year program of research focused on China. None of the sponsoring organizations played a role in the study design, collection, analysis, or interpretation of the data used for this study, nor did they influence our decisions to submit the article for publication, and all errors are our own

Will Economic Restructuring in China Reduce Trade-Embodied CO2 Emissions?

We calculate CO2 emissions embodied in China’s net exports using a multi-regional input-output database. We find that the majority of China’s export-embodied CO2 is associated with production of machinery and equipment rather than energy-intensive products, such as steel and aluminum. In 2007, the largest net recipients of embodied CO2 emissions from China include the EU (360 million metric tons, mmt), the U.S. (337 mmt), and Japan (109 mmt). Overall, annual CO2 emissions embodied in China’s net exports totaled 1,177 mmt, equal to 22% of China’s total CO2 emissions. We also develop a global general equilibrium model with a detailed treatment of energy and CO2 emissions. We use the model to analyze the impact of a sectoral shift in the Chinese economy away from industry and towards services, both without and with a decrease in China’s trade surplus, and a tax on energy-intensive exports, which reflect policy objectives in China’s Twelfth Five-Year Plan (2011–2015). We find that without a decrease in the trade surplus, both policies will have a limited impact on China’s net exports of embodied CO2 emissions. The policies have an even smaller effect on global emissions, as reduced production in China is partially offset by increased production elsewhere.We acknowledge the support of the National Social Science Foundation of China (Project No. Project No. 09&ZD029) and the Institute for Energy, Environment, and Economy at Tsinghua University, which is supporting Tianyu Qi’s doctoral research as a visiting scholar at the Massachusetts Institute of Technology. We further acknowledge the support of Eni S.p.A., ICF International, and Shell International Ltd., initial sponsors of the China Energy and Climate Project in the MIT Joint Program on the Science and Policy of Global Change at MIT. None of the sponsoring organizations played a role in the study design, collection, analysis, or interpretation of the data used for this study, nor did they influence our decisions to submit the article for publication, and all errors are our own. We also acknowledge general industrial and government sponsors of the Joint Program on the Science and Policy of Global Change (http://globalchange.mit.edu/sponsors/all)

Modeling the Prospects for Hydrogen Powered Transportation Through 2100

Abstract in HTML and technical report in PDF available on the MIT Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/).Hydrogen fueled transportation has been proposed as a low carbon alternative to the current gasoline-powered fleet. Using a computable general equilibrium model of the world economy we explore the economic viability of hydrogen transportation in several different tax and carbon dioxide stabilization policy scenarios. We represent the capital, labor, fuel and other costs of hydrogen production and hydrogen powered vehicles in the economic model. We examine scenarios where the hydrogen fuel price and vehicle cost are varied over a wide range to evaluate what technology improvements would be needed, in terms of cost reductions, for hydrogen vehicles to penetrate the market. We consider scenarios with and without climate policy, and in competition with other reduced-carbon fuel substitutes, such as ethanol-blend fuels. We find that hydrogen-powered fuel-cell vehicles could make a significant contribution to de-carbonization of the transportation fuel cycle if production of hydrogen itself is not carbon-intensive. Cost targets needed for the technology to penetrate in the USA are such that the hydrogen fuel would need to be in the range of 1 to 1.7 times the 1997 price of gasoline and the vehicle mark-up above an average fuel cell automobile would need no more than 1.3 to 1.5 times an average conventional vehicle. At the lower end of these cost ranges, the vehicle fleet could be competitive by 2020 but at the upper end we would only see entry of the fleet toward the end of the century. High fuel taxes in Europe makes fuel-efficient hydrogen fuel cell technology more competitive there than in the USA. Along with cost reductions, these results assume that technical issues are solved and that market hurdles of establishing the fuel distribution system are overcome. For those involved in hydrogen vehicle research this analysis provides cost targets that would need to met and, given they are achieved, an idea of when vehicles could be competitive and under what conditions.The authors gratefully acknowledge the financial support for this work provided by the MIT Joint Program on the Science and Policy of Global Change through a consortium of industrial sponsors, Federal grants that have supported the development of the modeling framework, especially the US Department of Energy, Integrated Assessment Program in the Office of Biological and Environmental Research (BER) grant DE-FG02-94ER61937 and US EPA agreement XA- 83344601-0 and XA-83240101, and an anonymous donor

Interprovincial Migration and the Stringency of Energy Policy in China

Interprovincial migration flows involve substantial relocation of people and productive activity, with implications for regional energy use and greenhouse gas emissions. In China, these flows are not explicitly considered when setting energy and environmental targets for provinces, and their potential impact on the effectiveness of policy alternatives is ignored. We analyze how migration affects outcomes under energy intensity targets and energy caps. While both policies are part of the nation’s Twelfth Five Year Plan (2011–2015) and imposed at the provincial level, only the intensity targets are binding at present. We estimate a migration model, integrate it into a general equilibrium model that resolves each province in China, and simulate the effect of migration on energy use and economic activity. We find that although both types of policies are affected by uncertain migration flows, energy intensity targets (energy use indexed to economic output) are more robust than absolute caps. They are also more cost-effective, placing less burden on the relatively clean in-migration provinces. Our findings also underscore the value of moving from provincial targets to an integrated national emissions trading system, given that the choice of abatement strategies will adjust endogenously to labor relocation.The authors thank Eni S.p.A., ICF International, Shell International Limited, and the French Development Agency (AFD), founding sponsors of the China Energy and Climate Project. We also gratefully acknowledge the support of the Energy Information Administration at the U.S. Department of Energy. We are also thankful for support provided by the Ministry of Science and Technology of China, the National Development and Reform Commission, and Rio Tinto China. We further gratefully acknowledge the financial suppo rt for this work provided by the MIT Joint Program on the Science and Policy of Global Change through a consortium of industrial sponsors and Federal grants. This work is also supported by the DOE Integrated Assessment Grant (DE-FG02-94ER61937)