Stylized agent-based modeling on linking emission trading systems and its implications for China's practice

Fang, C. & Ma, T. (2020). Stylized agent-based modeling on linking emission trading systems and its implications for China's practice. Energy Economics 92 e104916. 10.1016/j.eneco.2020.104916.

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China established a national emission trading system (ETS) to peak its carbon emission around 2030, building on the experience of pilot ETSs that are planned to be linked. Firms are the main entities that conduct carbon reduction and allowance trading. Due to the heterogeneity in the initial stock of technologies, firms' abatement costs differ, resulting in different abatement activities and the dynamics of the carbon price. Most of the studies on linking ETSs pay little attention to firms' behaviors, especially the interactions among firms' technology adoption strategies and their allowance trading strategies. In addition, whether linking ETSs can reduce carbon emission with lower system costs remains insufficiently explored. This study develops a stylized agent-based model (ABM) to explore the impact of linking two ETSs considering firms' heterogeneities and the interactions between their technology adoption strategies and allowance trading strategies. The model considers two ETSs, each of which includes energy-service-providing agents who are heterogeneous in the production scale and initial stock of technologies (and thus with different abatement costs), and attempts to minimize the total cost for a given output by adopting different technologies and trading emission allowances. The carbon price is dynamically affected by agents' willingness to pay, and a Walrasian auction is introduced to obtain the equilibrium. The results show that linking ETSs could be cost-effective to achieve carbon reduction commitment and creates a larger and more liquid carbon market; however, it also provides agents the opportunity to purchase more allowances rather than adopt low-emission technologies, which may result in more carbon emission. Adding restrictions on the linkage could somehow mediate this negative effect. Imposing strict exchange rate restrictions to the system with more balanced market shares of agents or quantitative restrictions would result in desirable results at the expense of increasing system costs. Moreover, restricted linkages could help alleviate the difficulties in initialing a linkage. The stylized ABM is mainly used for exploratory modeling purposes as a heuristic research device to examine in depth the effectiveness of unrestricted linkages and restricted linkages on adopting low-emission technologies at firms' level and the resulting carbon reduction. On the basis of the main findings of the ABM, we discuss the case if the Hubei pilot ETS links with the Guangdong pilot ETS, which could improve the understanding of the potential impact of linking ETSs on technology adoption and carbon reduction and provide policy implications for linking different ETSs.

Item Type: Article
Uncontrolled Keywords: Linking ETSs; Technology adoption; Restricted linkage; Agent-based modeling
Research Programs: Transitions to New Technologies (TNT)
Depositing User: Luke Kirwan
Date Deposited: 31 Aug 2020 06:47
Last Modified: 27 Aug 2021 17:33

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