Equality and efficiency tradeoffs in revenue recycling of emission trading scheme: a case study on the recent chinese national ETS market

Abstract

Owing to real constraints, a first-best climate policy is rarely socioeconomically optimal; therefore, policymakers may prefer a second-best or mixed policy, where revenue recycling (RR) is usually implemented as a complementary policy to the first-best policy. Unfortunately, how different RR policies affect equality and efficiency during first-best policy implementation remains to be researched. This paper attempts to narrow the research gap by designing and evaluating the RR policies for the emission trading scheme (ETS) simulating the Chinese National Emission Trading Scheme (CNETS). To achieve this research target, we have employed a dynamic recursive computable general equilibrium (CGE) model to analyze how the designed RR policies complement the ETS effects on emission abatement and economic growth. The results of the CGE model have confirmed the existence of a tradeoff between equality and efficiency. RR for income tax reduction is beneficial to emission abatement, but it has the worst performances on equality, Gross Domestic Product (GDP), and household welfare. RR for subsidizing renewable energy causes the lowest GDP loss, but it adversely impacts emission abatement owing to the induced economic boom. Lump-sum income transfer to low-income households is the best RR option because it is the most equitable way to use ETS revenues and induces the highest household welfare with satisfactory performances on emission abatement and GDP. Hence, ETS revenues are recommended to be transferred to low-income households.