Factorial equilibrium analyses for socio-economic implications of emission trading

Abstract

As the largest emitter of CO₂ emissions in the world, China has pledged to reach its CO₂ emission peak before 2030 and achieve carbon neutrality before 2060. In 2021, it implemented the policy of emission trading scheme to manage emissions from electricity sector. However, such a policy is unable to achieve its emission-mitigation target. This study aims to analyze the socio-economic effects of early carbon peak (i.e., before 2030) and sectoral coverage in emission trading scheme, as well as reveal the composite effects of multiple impact factors regarding the scheme and their interactions, through the development of a factorial emission-trading equilibrium model. It is found that the implementation of such policies would result in reductions in commodity output by sectors and further lead to the loss of real GDP. Specifically, the earlier the emission peak, the higher the GDP loss and carbon price. Meanwhile, the increase in the commodity price induced by the advance of the emission-peak point would result in a growth in commodity imports. Additionally, there are complex non-functional relationships that exist between industry coverage in emission trading scheme and the related multi-dimensional impact factors. The interactive relationships between emission-peak point and industry coverage in emission trading scheme would result in significant compound effects on the real GDP and carbon price, which are recommended to be considered while formulating relevant policies. Advance plans with corresponding allowances/benefits are also recommended to offset the impacts on households induced by implementing emission trading scheme-related policies.