An equilibrium model of the Chinese carbon trading market under the uncertainty of market demand: Application to thermal power industry

Abstract

This study examines how to choose between the reduction methods of reduce output (RO) and change in process (CIP) for enterprises under carbon trading regulations, and whether the carbon trading market can reach equilibrium under different emission reduction strategies. A carbon trading model based on the RO and CIP reduction methods was constructed, and two large thermal power groups were taken as examples for empirical analysis. The main conclusions are as follows: (1) When the demand faced by an enterprise is uniformly distributed and the form of the carbon abatement cost function is a logarithmic function, the enterprise has three emission reduction strategies to choose from: output reduction, mixed emission reduction, and industry exit. (2) The carbon trading market can reach equilibrium when the participants take different emission reduction strategies. (3) The allocation of initial carbon emission rights significantly affects the profits of enterprises. As the auction ratio of carbon emissions rights increases, the enthusiasm of enterprises to participate in the carbon trading market decreases. (4) The fluctuation of the carbon price is inversely related to the fluctuation in the macro coal price. Increasing the electricity price can improve the profits of enterprises without affecting the carbon price.