“Lock-in” effect of emission standard and its impact on the choice of market based instruments

- China's existing carbon intensity policy has a “lock-in” effect and leads to a “kink point” on MAC.
- A dynamic inter-regional CGE model is developed to simulate the regional kinked MAC curves in China.
- A timeline of introducing new market based instrument is proposed by combining different MB scenarios.

A country's existing emission standard policy will lead to a “lock in” effect. When the country plans to adopt new market-based instruments to control greenhouse gas emissions, it must consider this effect as it chooses among instruments to avoid larger efficiency loss. In this paper, we find that the “lock in” effect will cause a kink point to occur on the marginal abatement cost (MAC) curve. This change of shape for the MAC curve reminds us to be cautious in choosing market-based instruments when applying Weitzman's rule. We also introduce this concept into a dynamic multi-regional computable general equilibrium (CGE) model for China and simulate MAC curves for all regions. After applying Weitzman's rule, we propose a timeline for introducing price instruments under different marginal benefit (MB) curve scenarios.