Carbon market integration, productivity, and welfare: A quantitative analysis

Abstract

China's carbon market is far from being integrated. This paper studies how carbon emissions reduction and carbon market integration affect China's aggregate productivity and welfare via a quantitative spatial general equilibrium model with ${\mathrm{CO}}_2$ as a by-product of production. We find that (1) were carbon emission rights to be allowed to be traded across regions, (i) if there is no technological growth, China's overall productivity and real GDP would increase by 10.26%, and 27.19% respectively, and welfare would decline slightly by 0.92%; (ii) if the technology grows at the present growth rate, China's total output, real GDP and welfare would increase by 9.97, 38.57, and 7.79%, respectively; (2) were nine regional carbon trading markets integrated, China's overall productivity, real GDP and welfare would increase by 4.35, 29.17, and 7.75%, respectively.  Carbon market integration enables China to achieve economic development at a lower ${\mathrm{CO}}_2$ cost.