How will a nationwide carbon market affect regional economies and efficiency of CO2 emission reduction in China?

- We assess the impacts of a nationwide carbon market on regional economies in China.
- The combination of CGE and emissions trading models provides both macro and micro perspectives for the analysis.
- A nationwide carbon market can reduce regional economic disparities and macroeconomic costs of for the whole country.
- A nationwide carbon market can help China to achieve more ambitious reduction targets.
- The inter-regional transfers of funds show great potential of for enhancing the efficiency of technological investment.

As the country with the greatest energy consumption and CO2 emissions globally, China has commenced preparations for a nationwide carbon market, to be established during the period 2016-2020. Given the spatial heterogeneity of economic development across different regions, the nationwide market will have differing impacts on China's regional economies. The present paper uses a multi-regional CGE model to examine the effects of a nationwide carbon market on regional economies and CO2 reduction efficiency under different emission reduction targets. The results indicate that such a market can effectively reduce costs across the whole society, improving welfare and allocation efficiency of production factors and so reducing regional economic disparities and promoting coordinated regional development. These measures can help China to achieve more ambitious reduction targets with the same abatement costs, and large-scale inter-regional transfer of funds during emissions trading can be invested in CO2 mitigation technologies in economically backward regions, promoting CO2 reduction efficiency and industrial upgrading.