Scenario-based potential effects of carbon trading in China: An integrated approach

- Carbon dioxide shadow price shows a negative asymmetrical correlation with carbon dioxide emissions in China.
- The implements of carbon trading can bring Porter Hypothesis effect significantly.
- Provincial carbon trading can reduce carbon intensity by 19.79-25.24% in China.

Using China's provincial panel data and national panel data of OECD (Organization for Economic Co-operation and Development) and BRICS (Five major emerging national economies: Brazil, Russia, India, China and South Africa), this paper simulates the scenario-based potential effect of carbon trading in China. Analysis methods included Stochastic Frontier Analysis, Difference-in-differences Model, and Nonlinear Programming Technique. Results indicated that in a theory-based view of carbon trading, the shadow price of carbon dioxide generally rises, with a non-linear negative correlation with carbon dioxide emissions. In different regions, the shadow price of carbon dioxide presents a digressive tendency among eastern, central, and western areas, with divergent gaps between and within areas. When the greatest goal is assumed to reduce national carbon intensity as much as possible at the given national GDP (Gross Domestic Product) (Scenario I), carbon trading has the effect of reducing carbon intensity by 19.79%, with the consideration of Porter Hypothesis effect. If the rigid constraint of national GDP is relaxed, and the dual constraint of both economic growth and environment protection in each region is introduced (Scenario II), the resulting effect is a reduced carbon intensity of 25.24%. China's general carbon intensity in 2012 was higher than goals set at the Copenhagen Conference, but lagged behind the goal of Twelfth Five-Year Plan for National Economy. This study provides realistic and significant technical support for the government to use in designing and deploying a national carbon trading market.