The effects of allowance price on energy demand under a personal carbon trading scheme

Personal carbon trading (PCT) is a downstream cap-and-trade scheme which could be used to reduce carbon emissions from the household sector. To explore the effectiveness of this scheme, it is necessary to investigate how consumers respond to allowance price change. In this paper, a general utility optimization (GUO) model and a constant elasticity of substitution (CES) utility function are proposed to examine the price, substitution and income effects of carbon allowance price changes. It is shown that higher income consumers are more sensitive to the allowance price changes than lower income consumers. Moreover, the short-run adjustment in consumers' consumption of electricity in response to a change in allowance price would be lower than the long-run value. According to the sensitivity analysis, downward (upward) adjustments in the elasticity of substitution result in a positive (negative) effect on price effect. The findings in this study are used to draw policy implications. Suggestions for future research are also provided.