37th IAEE International Conference37

Study the Sector Coverage in the ETS in China

Ying Fan, Xu Wang, Lei ZhuYing Fan, Xu Wang, Lei Zhu

Center for Energy and Environmental Policy research (CEEP)Institute of Policy and Management

Chinese Academy of Sciences (CAS)

www.ceep.cas.cn

y ( )June 15-18, 2014 New York, USA

7 ETS pilots in China are initiated

Tianjin

BeijingShanghai

HubeiChongqing gq gGuangdongShenzhen

www.ceep.cas.cn 2

Introduction

C f ifi d b k tCoverage of unified carbon market:

Transaction cost Immature of ETS

It is difficult to include all sectors in ETS

Wh i h ffi iWhat is the most efficient inclusion in ETS

www.ceep.cas.cn 3

CO2 emissions, GDP and CO2 intensity for each region in 2010Region 2010 emissions

(million tons )2010 GDP

(million RMB)2010 CO2 intensity

(tons per ten thousand RMB)125 85 1411358 0 891Beijing 125.85 1411358 0.891

Tianjin 179.42 922446 1.945

Hebei 839.89 2039426 4.118

Shanxi 491.84 920086 5.3461167200 4 991Inner Mongolia 582.56 1167200 4.991

Liaoning 595.15 1845727 3.224

Jilin 241.17 866758 2.782

Heilongjiang 247.43 1036860 2.386

Shanghai 260.27 1716598 1.516

Jiangsu 695.10 4142548 1.678

Zhejiang 384.58 2772231 1.387

Anhui 293.07 1235933 2.371

Fujian 221.83 1473712 1.505

Jiangxi 160.45 945126 1.698

Shandong 899.27 3916992 2.296

Henan 592.88 2309236 2.567

Hubei 403.07 1596761 2.524

Hunan 301.55 1603796 1.880

Guangdong 545.42 4601306 1.185

Guangxi 199.54 956985 2.085

Hainan 30.94 206450 1.499

Chongqing 150.18 792558 1.895

Sichuan 341.38 1718548 1.986

Guizhou 225.29 460216 4.895

4

Yunnan 227.61 722418 3.151

Shan-xi 245.03 1012348 2.420

Gansu 156.85 412075 3.806

Ningxia 108.77 168965 6.438

Targets for CO2 Intensity Reduction in the 12th Five-Year Plan

Region Reduction of CO2

Emissions per unit GDP (%)

Region Reduction of CO2

Emissions per unit GDP (%)(%) (%)

Beijing 18 Henan 17 Tianjin 19 Hubei 17 Hebei 18 Hunan 17Hebei 18 Hunan 17 Shanxi 17 Guangdong 19.5

Inner Mongolia 16 Guangxi 16 Liaoning 18 Hainan 11Liaoning 18 Hainan 11

Jilin 17 Chongqing 17 Heilongjiang 16 Sichuan 17.5

Shanghai 19 Guizhou 16Shanghai 19 Guizhou 16 Jiangsu 19 Yunnan 16.5

Zhejiang 19 Shan-xi 17 Anhui 17 Gansu 16Anhui 17 Gansu 16 Fujian 17.5 Ningxia 16 Jiangxi 17 Xinjiang 11

Shandong 18 Total 17Shandong 18 Total 17

5

Projected GDP for each region in 2015

Region GDP annual growth rate

GDP in Year 2015(million RMB) Region GDP annual

growth rateGDP in Year 2015

(million RMB)

Beijing 8% 2073747 94 Henan 9% 3553045 83Beijing 8% 2073747.94 Henan 9% 3553045.83

Tianjin 12% 1625665.04 Hubei 10% 2571599.56

Hebei 9% 3066596.55 Hunan 10% 2582929.50

Shanxi 13% 1695198.81 Guangdong 8% 6760828.10

Inner Mongolia 12% 2057005.21 Guangxi 10% 1541233.91

Liaoning 11% 3110157.33 Hainan 13% 380370.74

Jilin 12% 1527523.75 Chongqing 13% 1428215.25

Heilongjiang 12% 1827301.60 Sichuan 12% 3028668.77

Shanghai 8% 2522245 64 Guizhou 12% 811057 84Shanghai 8% 2522245.64 Guizhou 12% 811057.84

Jiangsu 10% 6671614.98 Yunnan 10% 1163461.41

Zhejiang 8% 4073316.84 Shan-xi 12% 1784103.08

Anhui 15% 2485902.72 Gansu 12% 726216.95

Fujian 10% 2373427.91 Ningxia 12% 297774.06

Jiangxi 11% 1592592.27 Xinjiang 10% 875709.98

6

Shandong 9% 6026777.72 Total 7% 55819174.54

Projected CO2 intensity for in 2015 in BAU scenario (tons per ten thousand RMB)( p )

Region Reduction of CO2 intensity per year

CO2 intensity in 2015 Region Reduction of CO2

intensity per year CO2 intensity in 2015

Beijing 0.03 0.766 Henan 0.0235 2.280

Tianjin 0.0275 1.692 Hubei 0.0241 2.234

Hebei 0 0241 3 645 Hunan 0 0245 1 661Hebei 0.0241 3.645 Hunan 0.0245 1.661

Shanxi 0.026 4.686 Guangdong 0.025 1.044

Inner Mongolia 0.02 4.512 Guangxi 0.02 1.885

Li i 0 025 2 841 H i 0 015 1 390Liaoning 0.025 2.841 Hainan 0.015 1.390

Jilin 0.026 2.439 Chongqing 0.025 1.670

Heilongjiang 0.025 2.103 Sichuan 0.0275 1.728

Shanghai 0.0275 1.319 Guizhou 0.02 4.425

Jiangsu 0.0245 1.482 Yunnan 0.015 2.921

Zhejiang 0.024 1.229 Shan-xi 0.027 2.111

Anhui 0.024 2.100 Gansu 0.026 3.337

Fujian 0.01 1.431 Ningxia 0.015 5.969

Jiangxi 0.026 1.488 Xinjiang 0.02 3.098

7

Shandong 0.02 2.075 Total 0.0241 2.021

Abatement targets of each province in 2015 (million tons)Region 2010 emissions 2015 emissions in BAU Scenario 2015 emissions in Constraint Scenario abatementBeijing 125.85 158.79 151.63 7.16

Tianjin 179.42 275.05 256.13 18.93

Hebei 839.89 1117.89 1035.58 82.30

Shanxi 491.84 794.35 752.14 42.22

Inner Mongolia 582.56 928.03 862.40 65.63

Liaoning 595.15 883.63 822.35 61.27

Jilin 241.17 372.57 352.77 19.80

Heilongjiang 247.43 384.21 366.29 17.92

Shanghai 260.27 332.65 309.76 22.89

Jiangsu 695.10 988.88 906.76 82.12

Zhejiang 384.58 500.45 457.71 42.73

Anhui 293.07 522.04 489.25 32.79

Fujian 221.83 339.75 294.74 45.01

Jiangxi 160.45 237.01 224.41 12.60

Shandong 899.27 1250.70 1134.58 116.12

Henan 592.88 809.95 757.14 52.81

Hubei 403.07 574.61 538.80 35.81

Hunan 301.55 429.00 403.09 25.91

Guangdong 545.42 706.11 645.12 60.98

Guangxi 199.54 290.48 269.94 20.54

Hainan 30.94 52.86 50.74 2.12

Chongqing 150.18 238.45 224.62 13.83

Sichuan 341.38 523.33 496.35 26.99

Guizhou 225.29 358.89 333.51 25.38

Yunnan 227.61 339.88 306.08 33.80

Shan-xi 245.03 376.60 358.42 18.18

Guizhou 156.85 242.31 232.20 10.11

Ningxia 108.77 177.74 161.03 16.72

Xinjiang 186.39 271.34 267.16 4.188

What role does an unified ETS will play? Local governments may decrease their abatement cost

through ETS by allocating between Trading sectors and Non trading sectorsNon-trading sectors.

www.ceep.cas.cn 9

Strategic allocation

Eastern region Western regionTrading Trading

Marginal

sector sector Marginal c

MAC

MAC

cost

P

cost

abatementR* R0 R1Non-trading

Non-trading

abatementR0R1 R*

Marginal co

sectorMarginal

gsectorMAC

MAC

ostcost

www.ceep.cas.cn 10abatement

R*R0abatement

R0R*

Analytical framework

Central government: decides the inclusion of ETS

allocates allowances among regions

GameEastern region:Allocate allowances

Act simultaneously

GameWestern region:Allocate allowancesAllocate allowances

between Trading sectors and Non-trading sectors.

y

Cost saving

Allocate allowances between Trading sectors and Non-trading sectors.

Nash-Cournot game in strategic allocation g g

Potential effect on the allowances price, abatement cost and trading volumes

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Theoretical model

Nash-Cournot game in strategic allocation

assume that China will initiate the unified carbon market in 2015; for region , abatement target is . i ˆ

iA suppose allocating allowance to trading sectors, then non-trading

sectors get , the real abatement is , the difference will be traded in the ETS

iq,

ˆi NT i iA A q

i TA the real abatement is , the difference will be traded in the ETS allowance price is a function of total number of total abatement: MAC of trading and non-trading sectors is and respectively;,i TC

( )ii

p p q ,i N TC

,i TA

objective for each region is to minimal total abatement cost； Objective function：

min [ ( ) ( )( ) ( )]C A p q q q A C A （1）

The first order condition with respect to ：min

iq , , , , ,[ ( ) ( )( ) ( )]i T i T i j i i T i NT i NTj i

C A p q q q A C A

( )i NT i i TC p q A p

（1）

（2）iq

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, ,( )i NT i i Tp q pRef: Böhringer and Rosendahl (2009)

Policy scenariosy

Scenario Characteristics

No Trade Allowance trading is prohibited across regions

Trade Strategic partitioning has no influence on the unified carbon market

Nash Each region may have the ability to manipulate the allowance price in the ETS

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Definition of the sectoral coverage by caseg y

description

Case 1paper and printing is removed from the Base Case scenario coverage

Case 1

BTrading sectors cover mining; paper and printing; processing of petroleum, coking,

i f l f l l d l d d i dBase case processing of nuclear fuel; metals and non-metal products; production andsupply of electric power and gas

C 2 Ch i l d t i i l d d i th B C ETSCase 2 Chemical products is included in the Base Case ETS

Case 3 Machinery is included in the Case 2 ETS

Case 4 Foods and Tobacco is included in the Case 3 ETS

Case 5 Textile is included in the Case 4 ETS

Case 6 Wood is included in the Case 5 ETS

Case 7 Other sectors are included in the Case 6 ETS ，i.e. ETS covers all industrial sectors

Case Alltrade all sectors are included in the ETS

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Comparison of scenario No Trade, Trade and Nash based on the ETS coverage of the Base case

Region No trade Trade Nash

MACT MACNT TAC MACT MACNT TAC MACT MACNT TAC

Beijing 49 89 49 89 176 37 45 62 45 62 175 10 45 74 45 77 175 17Beijing 49.89 49.89 176.37 45.62 45.62 175.10 45.74 45.77 175.17

Tianjin 81.25 81.25 754.89 45.62 45.62 612.71 45.74 46.21 613.68

Hebei 33.68 33.68 1373.36 45.62 45.62 1205.07 45.74 44.08 1201.92

Shanxi 21.95 21.95 461.81 45.62 45.62 -68.38 45.74 43.30 -69.33

Inner Mongolia 35 61 35 61 1158 16 45 62 45 62 1068 73 45 74 44 69 1066 77Inner Mongolia 35.61 35.61 1158.16 45.62 45.62 1068.73 45.74 44.69 1066.77

Liaoning 36.97 36.97 1121.14 45.62 45.62 1061.19 45.74 44.92 1059.57

Jilin 23.85 23.85 234.58 45.62 45.62 43.77 45.74 44.70 41.71

Heilongjiang 50.46 50.46 446.80 45.62 45.62 442.77 45.74 45.84 442.97

Shanghai 54 86 54 86 619 05 45 62 45 62 601 89 45 74 45 95 602 33Shanghai 54.86 54.86 619.05 45.62 45.62 601.89 45.74 45.95 602.33

Jiangsu 71.62 71.62 2888.04 45.62 45.62 2516.09 45.74 47.41 2519.85

Zhejiang 70.24 70.24 1472.61 45.62 45.62 1296.08 45.74 46.59 1297.84

Anhui 38.38 38.38 622.63 45.62 45.62 601.00 45.74 45.38 600.28

Fujian 113 36 113 36 2474 21 45 62 45 62 1612 37 45 74 47 27 1615 53Fujian 113.36 113.36 2474.21 45.62 45.62 1612.37 45.74 47.27 1615.53

Jiangxi 41.06 41.06 255.74 45.62 45.62 252.66 45.74 45.66 252.50

Shandong 83.52 83.52 4755.39 45.62 45.62 3796.87 45.74 48.68 3804.80

Henan 45.60 45.60 1189.10 45.62 45.62 1189.10 45.74 45.73 1189.09

Hubei 43 95 43 95 778 71 45 62 45 62 777 61 45 74 45 65 777 45Hubei 43.95 43.95 778.71 45.62 45.62 777.61 45.74 45.65 777.45

Hunan 51.15 51.15 653.66 45.62 45.62 646.20 45.74 45.90 646.52

Guangdong 144.07 144.07 4265.29 45.62 45.62 2310.54 45.74 48.11 2315.98

Guangxi 59.63 59.63 603.22 45.62 45.62 570.67 45.74 46.01 571.23

Hainan 43 46 43 46 45 67 45 62 45 62 45 56 45 74 45 73 45 55Hainan 43.46 43.46 45.67 45.62 45.62 45.56 45.74 45.73 45.55

Chongqing 50.63 50.63 345.58 45.62 45.62 342.28 45.74 45.82 342.43

Sichuan 42.52 42.52 567.39 45.62 45.62 564.45 45.74 45.62 564.22

Guizhou 29.16 29.16 367.66 45.62 45.62 252.90 45.74 44.92 251.33

Yunnan 46 19 46 19 771 23 45 62 45 62 771 11 45 74 45 76 771 15Yunnan 46.19 46.19 771.23 45.62 45.62 771.11 45.74 45.76 771.15

Shan-xi 49.51 49.51 444.72 45.62 45.62 442.03 45.74 45.82 442.20

Gansu 23.70 23.70 119.04 45.62 45.62 19.60 45.74 45.20 18.52

Ningxia 22.68 22.68 188.44 45.62 45.62 0.56 45.74 44.77 -1.39

Xinjiang 10 48 10 48 21 85 45 62 45 62 217 85 45 74 44 94 219 46

Equilibrium carbon price and cost-saving

40.00%50.00

45.98 45.74 35.00%46.00

48.00

/CO

2)

29.68%

43.87 43.30

42.06 41.91 41.77 41.68

40 12

30.00%42.00

44.00

avin

g

ce p

rice(

RM

B/

24.96%25.48%

25.92%26.36% 26.65% 26.71%

40.12

25.00%38.00

40.00

Cos

t sa

briu

m a

llow

an

18.87%

21.37%

20.00%

32 00

34.00

36.00

equi

li

15.00%30.00

32.00

Case 1 Base case Case 2 Case 3 Case 4 Case 5 Case 6 Case 7 All trade

cost saving allowance price

www.ceep.cas.cn 16

cost saving allowance price

Percentage of ETS Percentage of ETS Trading Volume among regions

Comparison of different inclusionsg

covered emissions g

covered GDP g g g

in million tons

Case1 64.54 17.29 178.95 Base case 65.68 18.34 182.03 Case2 74.39 23.64 218.77 Case3 77.51 24.59 231.35

Case4 79.91 35.31 232.25

Case5 81.64 39.59 232.88 Case6 81.93 42.94 233.25 Case7 82.41 44.27 235.20 All trade 100 100 235.23

As more sectors are successively included in the ETS, equilibrium ll i d ll d li b t it h littl dallowance price gradually declines, but it changes little and are very

close to the price level in the All Trade case; When adding more sectors into trading sectors based on case 2, the g g ,

cost-saving effect increases little; Although more sectors could trade allowances as the broaden inclusion

of emissions trading scheme There is no obvious increasing trend in

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of emissions trading scheme, There is no obvious increasing trend in the trading volumes.

Analysis on unified ETS

h i i i i ifi d h i The main participants in an unified ETS are the regions where the share of emission intensive industries is relatively larger;larger;

These regions have the potential to manipulate the allowance price in the ETS;price in the ETS;

Unified ETS brings remarkable influence on the total abatement cost and economic output of these regions both p gdomestically and locally;

In the emissions trading scheme, there is no obvious increasing trend in the volume of allowance trading when more sectors are included in ETS after Case 2;

www.ceep.cas.cn 18

Discussion on different inclusion of ETS in China

1) Transaction cost

Case 1 Basecase Case 2 Case 3 Case 4 Case 5 Case 6 Case 7

Additional cost-saving 2.50% 3.59% 0.52% 0.44% 0.44% 0.29% 0.05%

Based on empirical evidence in Ireland and Germany, the transaction costs as a p y,

proportion of total compliance costs represent 1.50–1.70%;

Marginal cost-saving effect increase little if change the inclusion of ETS from case g g g

3 to case 7, which may not offset the impact of transaction cost.

www.ceep.cas.cn 19

Discussion on suitable inclusion of ETS in China

2) Differences in regional abatement cost

The deviation in parameter of abatement cost function for the sectors covered in each Case

Base case Case2 Case3 Case4 Case5 Case6 Case7

,i j

Base case Case2 Case3 Case4 Case5 Case6 Case7

Standarddeviations 39.61 76.87 43.07 39.61 37.70 49.62 55.93deviationsof($/ton)

39.61 76.87 43.07 39.61 37.70 49.62 55.93,i j

mining, paper and printing

Therefore, the suitable inclusion of ETS is case2, including:

paper and printing, processing of petroleum, coking, processing of nuclear fuel, chemical products, metals and non-metal products,

www.ceep.cas.cn 20

metals and non metal products, production and supply of electric power and gas

Conclusion

Unified ETS will play an important role in CO2 reduction both in cost saving effect and mechanism to support resource oriented regionssaving effect and mechanism to support resource-oriented regions.

Even though the ETS does not include all the sectors, the regional strategic partitioning has little influence on the allowance price and compliance costs.

As a consequence of strategic allocation in the context of ETS, the cost saving in non-trading sector is also achievedcost saving in non trading sector is also achieved.

When industrial sectors are successively included in the ETS, allowance prices essentially range between 40–50 RMB/ton CO2,

hi h i i i l f l b h l iwhich give a price signal for low carbon technology investment. The suitable inclusion of ETS in China could cover the following

industrial sectors: mining; paper and printing; processing ofindustrial sectors: mining; paper and printing; processing of petroleum, coking, processing of nuclear fuel; chemical products; metals and non-metal products; production and supply of electric

dwww.ceep.cas.cn

power and gas

21

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