Interaction between electricity market reform and carbon
pricing: insights from a strengthened scrutiny for carbon
leakage in China
Xin WANG
Tsinghua University
June, 2017
β’ Motivation
β’ Methodology
β’ Results
β’ Conclusions
2017/3/6 2
Outline
Motivation
β’ Domestic carbon emissions that are displaced by relatively cheaper imported
products rather than reduced as anticipated
β’ Relocation of Chinese capacity
Carbon Leakage
Motivation
πΆπΌπ =π·πΈπ Γ π΄πΉπ + πΌπΈπ Γ ππΆπ2
πΊππ΄π
Impact from indirect emission
Source: Sato et al. (2015)
Electricity Market Reform (EMR)
Cost Pass-Through Rate (CPTR)
Power generators
Non-ETS sectors
ETS sectors
Quota Price
Carbon tax
Emission Trading Scheme (ETS)
Motivation
Electricity Market Reform (EMR)
Cost Pass-Through Rate (CPTR)
Power generators
Non-ETS sectors
ETS sectors
Quota Price
Carbon tax
Emission Trading Scheme (ETS)
Methodology
Methodology-Cost Pass-Through Rate
Methodology-Cost Pass-Through Rate
Electricity Market Reform (EMR)
Cost Pass-Through Rate (CPTR)
Power generators
Non-ETS sectors
ETS sectors
Quota Price
Carbon tax
Emission Trading Scheme (ETS)
Methodology
Modeling or single-country assessment
Quantitative assessment at four-
digit sector level
In summary, these studies focus on the impact ofETS on the economic benefits and tradeperformance of industrial sectors
Modelling assessment fails to reflect the natureof carbon leakage provision in Directive (NACE-4classification)
For ChinaMore interprovincial than inter-sectoral, thuscanβt provide more tailored guidance for designof Chinaβs ETS in 2017
Methodology
CI
indicator
Electricity market structure
TI
indicatorRegulated Liberalized
Carbon tax
π‘πΆπ2 = π΄πΉππ£π Γ ππΆπ2
ETS: π·πΈπ+πΌπΈπ Γπ΄πΉπΓππΆπ2
πΊππ΄π
Non-ETS: π·πΈπΓπ‘πΆπ2
πΊππ΄π
ETS: π·πΈπΓπ΄πΉπ+πΌπΈπΓπΆπππ Γπ΄πΉπππ ΓππΆπ2
πΊππ΄π
Non-ETS: π·πΈπΓπ‘πΆπ2+πΌπΈπΓπΆπππ Γπ΄πΉπππΓππΆπ2
πΊππ΄π
ππΌπ =πΈππ + πΌππ
πππ + πΌππ
No carbon
tax
ETS: π·πΈπ+πΌπΈπ Γπ΄πΉπΓππΆπ2
πΊππ΄π
Non-ETS: n/a
ETS: π·πΈπΓπ΄πΉπ+πΌπΈπ ΓππΆπ2
πΊππ΄π
Non-ETS: πΌπΈπΓππΆπ2
πΊππ΄π
ππΌπ =πΈππ + πΌππ
πππ + πΌππ
Methodology-Identification Criteria
CaseETS
threshold
Electricity
marketCarbon tax Identification
Sensitivity
analysis
I5000t CO2/a
(112 4-digit)Regulated w/o
CI criterion
Directive criterion
Dual criterion
PCO2
IINDRC 2016
(13 4-digit)
Regulated/liberali
zed
w and w/o
scenariosDual criterion
AFavg and
thresholds of
ETS
IIINDRC 2016
(13 4-digit)
Regulated/liberali
zed in stages
w and w/o
scenariosDual criterion CPTR
Methodology-Identification Criteria
β’ For industrial sectors within ETS, allocating 15.8% of total emission permits for
free is sufficient in regulated electricity market, while the fraction varies from
7.9% to 17.0% in various CPTR scenarios.
Results-ETS sectors
Results-Non-ETS sectors
β’ The compensation measured as equivalent free permits in different scenarios
remains positive correlation with the reform progress expressed as increasing cost
pass-through rate, up to 5.6% and 4.5% for scenarios with and without carbon tax.
Results-Regulated v.s. Liberalized Market
β’ With the inclusion thresholds gradually
decreasing, the risk of carbon leakage of non-ETS
sectors is diminishing as well and the
compensation for industrial sub-sectors inside
ETS steadily increase.
β’ Electricity reform may have huge implication on
carbon cost of energy intensive industries
Results-Power generators
β’ The Nash Equilibrium Solution of the game that power generators as
participators of carbon market is CPTR=100% & 100% of free permits.
β’ The feedback from power generators is to appeal a higher level of liberalization
and fast progress of electricity market reform in China.
Conclusions
β’ The feedback from power generators in ETS is a faster reform progress
β’ Electricity market reform could have implication on carbon leakage risk
of downstream sectors through cost pass through mechanism
β’ Carbon leakage risk in non-ETS sectors will increase under scenarios
with combined effects from carbon tax and electricity sector reform
β’ The analysis doesnβt consider the possibility of decreasing price due to
reform
Xin WANG
Institute of Energy, Environment and Economy
Tsinghua University
Email: [email protected]
Thanks for your attention!