Energy and economic impacts of an international multi-regional carbon market

The establishment of a global multi-regional carbon market is considered to be a cost effective approach to facilitate global emission abatement and has been widely concerned. The ongoing planned linkage between the European Union’s carbon market and a new emission trading system in Australia in 2015 would be an important attempt to the practice of building up an international carbon market across different regions. To understand the abatement effect of such a global carbon market and to study its energy and economic impact on different market participants, this article adopts a global dynamic computable general equilibrium model with a detailed representation of the interactions between energy and economic systems. Our model includes 20 economic sectors and 19 regions, and describes in detail 17 energy technologies. Bundled with fossil fuel consumptions, the emission permits are considered to be essential inputs in each of the production and consumption activities in the economic system to simulate global carbon market policies. Carbon emission permits are endogenously set in the model, and can be traded between sectors and regions. Considering the current development of the global carbon market, this study takes 2020 as the study period. Four scenarios (reference scenario, independent carbon market scenario, Europe Union (EU)–Australia scenario, and China-EU-Australia scenario) are designed to evaluate the impact of the global carbon market involving China, the EU, and Australia. We find that the carbon price in the three countries varies a lot, from $32/tCO₂ in Australia, to $17.5/tCO₂ in the EU, and to $10/tCO₂ in China. Though the relative emission reduction (3%) in China is lower than that in the EU (9%) and Australia (18%), the absolute emission reduction in China is far greater than that in the EU and Australia. When China is included in the carbon market, which already includes the EU and Australia, the prevailing global carbon price falls from $22 per ton carbon dioxide (CO₂) to $12/tCO₂, due to the relatively lower abatement cost in China. Seventy-one percent of the EU’s and eighty-one percent of Australia’s domestic reduction burden would be transferred to China, increasing 0.03% of the EU’s and 0.06% of Australia’s welfare. The emission constraint improves the energy efficiency of China’s industry sector by 1.4%, reduces coal consumption by 3.3%, and increases clean energy by 3.5%.