Implication of Renewable Heat Policy on Reducing Carbon Emissions in China: A Dynamic CGE Simulation

In 2020, China pledged to achieve carbon emission peaking before 2030 and carbon emission neutrality before 2060. Renewable heat is a key solution for decarbonizing the heating sector, which is responsible for more than 40% of global CO2 emissions. Policy interventions are necessary for scaling up renewable heat deployment due to both economic and non-economic barriers faced, while the instrument selection should be taken into account carefully. Thus, a dynamic computable general equilibrium (CGE) model was built to evaluate and compare the effects with different renewable heat policy shocks. The scenario analysis method is applied to compare two types of policies relative to baseline scenarios, subsidy, and energy tax. The findings indicate that: first, both subsidy and energy tax have positive effects on CO2 emission reductions while economic factors should also be accounted for. Secondly, the selection of subsidy and energy tax should seek a balance between economic factors and environmental factors as they may also affect economic growth or sectoral output to some degree. The energy tax rate should be moderate to avoid high economic impact. Thirdly, energy tax levying in the medium-long term has a beneficial impact on GHG emissions, while the instruments should be adopted with a careful rate chosen to avoid unnecessary tax burden on sectors that impede the orderly transition of relevant industries. Fourthly, it's reasonable to set a relatively high subsidy rate in the initial stage and gradually reduce the intensity of the renewable heating subsidy rate. For the energy tax rate, it is necessary to connect with the carbon trading market to set a relatively reasonable rate-setting mechanism to meet the dynamic needs of different stages.