Can China's energy-consumption permit trading scheme achieve the Porter effect? Evidence from an estimated DSGE model

The implementation of China's energy-consumption permit trading scheme (ECPTS) is a recent initiative to accelerate energy transition towards carbon neutrality; however, its impacts on the economy and environment have not been well studied. A dynamic stochastic general equilibrium (DSGE) model is employed to estimate the macroeconomic effect of the ECPTS. The results show that in the short term, the ECPTS could obtain environmental dividends but fails to achieve the Porter effect, and its energy-saving effect is only significant over the long run. When combined with the implementation of carbon tax, the negative impact of the ECPTS on final output could be narrowed but a long-term loss of social welfare is inevitable due to labor transfer costs between energy firms. Moreover, a low-carbon energy structure could weaken the macroeconomic effect of the ECPTS, which is in line with expectations as China's energy transition aims to achieve large-scale development of renewable energy. The findings support the Chinese government to expand the regional coverage of the ECPTS and explore a coordination mechanism with carbon pricing policy. The government is also suggested to improve the legislation and supporting measures of the ECPTS to weaken its negative impact on the macroeconomy.

Automated summary

The implementation of China's energy-consumption permit trading scheme (ECPTS) is aimed at accelerating energy transition towards carbon neutrality. However, its impacts on the economy and environment have not been well studied. A DSGE model is used to estimate the macroeconomic effect of the ECPTS, showing that it achieves environmental benefits in the short term but fails to achieve the expected economic effects. Combining the ECPTS with carbon tax can partially mitigate its negative impact on output, but long-term loss of social welfare is inevitable due to labor transfer costs. A low-carbon energy structure may weaken the macroeconomic effect of the ECPTS.