Can ETS pricing policies and clean subsidy policies lead to a cleaner power generation sector

Abstract

China currently implements an intensity-based carbon emissions trading system (ETS), a pricing mechanism that limits emissions while subsidizing output. This system has helped mitigate production losses associated with emission reductions. However, it tends to preserve traditional energy structures and impedes the transition toward cleaner development, particularly given China's reliance on inexpensive coal and the higher cost of cleaner energy sources. In response, China is actively considering new pricing strategies aimed at reducing output subsidies. This study develops a dynamic stochastic general equilibrium (DSGE) model that integrates the ETS with the power sector to evaluate how changes in pricing policies and clean energy subsidies influence emissions reduction and energy transition. The results indicate that: (i) transitioning to an aggregate-based pricing system significantly reduces emissions but also suppresses electricity generation due to insufficient incentives for clean energy adoption; (ii) increasing subsidies for clean energy promotes technological transition but has a limited impact on emissions, as it does not increase the relative cost of coal-fired power; and (iii) combining pricing reform with clean energy subsidies achieves greater emissions reductions and better preserves electricity output than either policy alone.