How can China achieve its goal of peaking carbon emissions at minimal cost? A research perspective from shadow price and optimal allocation of carbon emissions

The Chinese government has declared a determination at the 75th United Nations General Assembly that China will improve its independent contribution and adopt more powerful measures to peak the carbon emissions before 2030. However, such strict implementation of carbon reduction policies is bound to bring the cost of sacrificing economic development. In such a context, this paper tries to use shadow price to measure the average social cost of emission reduction, marginal abatement cost to depict the pressure to reduce carbon emissions based on non-radial distance function, and provides an optimal scheme for provincial emission reduction to minimize the national cost of emission reduction based on variable-coefficient model. Results show that: First, the average value of shadow price is 15.91 and varies widely among regions, which means on average reducing one unit of carbon emissions will sacrifice 15.914 yuan RMB of economic output, and there exists possibility of carbon transactions across regions; Second, on the one hand, marginal abatement cost of carbon emission for most regions presents an upward tendency over time, which means greater economic costs have to be sacrificed with economic development in the future; On the other hand, marginal abatement cost is much higher in regions with high economic level than that in the economically undeveloped areas, which indicates reducing carbon emissions is becoming increasingly difficult and would pay more economical cost in economically developed regions; Third, the optional allocation scheme of CO2 reduction derived from this research is better than administrative ways of Grandfathering and Benchmarking in terms of minimizing emission reduction cost. Results of this paper indicate that larger carbon trading market can be implemented in China to economically fulfill the commitment of peaking carbon emissions.

Automated summary

The Chinese government has announced at the 75th United Nations General Assembly its determination to peak carbon emissions before 2030 by improving its independent contribution and adopting more powerful measures. However, strict implementation of carbon reduction policies will inevitably come at the cost of economic development. This paper calculates the average social cost of emission reduction using shadow price, depicts the pressure to reduce carbon emissions based on marginal abatement cost, and provides an optimal provincial emission reduction scheme to minimize national cost based on a variable-coefficient model. The results suggest the possibility of carbon transactions between regions, indicate increasing economic costs with future economic development, and propose an optimal allocation scheme for CO2 reduction that outperforms administrative approaches.