Interaction between electricity market reform and carbon

pricing: insights from a strengthened scrutiny for carbon

leakage in China

Xin WANG

Tsinghua University

June, 2017

• Motivation

• Methodology

• Results

• Conclusions

2017/3/6 2

Outline

Motivation

• Domestic carbon emissions that are displaced by relatively cheaper imported

products rather than reduced as anticipated

• Relocation of Chinese capacity

Carbon Leakage

Motivation

𝐶𝐼𝑖 =𝐷𝐸𝑖 × 𝐴𝐹𝑖 + 𝐼𝐸𝑖 × 𝑃𝐶𝑂2

𝐺𝑉𝐴𝑖

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, thuscan’t provide more tailored guidance for designof China’s ETS in 2017

Methodology

CI

indicator

Electricity market structure

TI

indicatorRegulated Liberalized

Carbon tax

𝑡𝐶𝑂2 = 𝐴𝐹𝑎𝑣𝑔 × 𝑃𝐶𝑂2

ETS: 𝐷𝐸𝑖+𝐼𝐸𝑖 ×𝐴𝐹𝑖×𝑃𝐶𝑂2

𝐺𝑉𝐴𝑖

Non-ETS: 𝐷𝐸𝑖×𝑡𝐶𝑂2

𝐺𝑉𝐴𝑖

ETS: 𝐷𝐸𝑖×𝐴𝐹𝑖+𝐼𝐸𝑖×𝐶𝑃𝑇𝑅×𝐴𝐹𝑒𝑙𝑒 ×𝑃𝐶𝑂2

𝐺𝑉𝐴𝑖

Non-ETS: 𝐷𝐸𝑖×𝑡𝐶𝑂2+𝐼𝐸𝑖×𝐶𝑃𝑇𝑅×𝐴𝐹𝑒𝑙𝑒×𝑝𝐶𝑂2

𝐺𝑉𝐴𝑖

𝑇𝐼𝑖 =𝐸𝑋𝑖 + 𝐼𝑀𝑖

𝑇𝑂𝑖 + 𝐼𝑀𝑖

No carbon

tax

ETS: 𝐷𝐸𝑖+𝐼𝐸𝑖 ×𝐴𝐹𝑖×𝑃𝐶𝑂2

𝐺𝑉𝐴𝑖

Non-ETS: n/a

ETS: 𝐷𝐸𝑖×𝐴𝐹𝑖+𝐼𝐸𝑖 ×𝑃𝐶𝑂2

𝐺𝑉𝐴𝑖

Non-ETS: 𝐼𝐸𝑖×𝑝𝐶𝑂2

𝐺𝑉𝐴𝑖

𝑇𝐼𝑖 =𝐸𝑋𝑖 + 𝐼𝑀𝑖

𝑇𝑂𝑖 + 𝐼𝑀𝑖

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

• 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

• 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

• 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.

• Electricity reform may have huge implication on

carbon cost of energy intensive industries

Results-Power generators

• The Nash Equilibrium Solution of the game that power generators as

participators of carbon market is CPTR=100% & 100% of free permits.

• The feedback from power generators is to appeal a higher level of liberalization

and fast progress of electricity market reform in China.

Conclusions

• The feedback from power generators in ETS is a faster reform progress

• Electricity market reform could have implication on carbon leakage risk

of downstream sectors through cost pass through mechanism

• Carbon leakage risk in non-ETS sectors will increase under scenarios

with combined effects from carbon tax and electricity sector reform

• The analysis doesn’t consider the possibility of decreasing price due to

reform

Xin WANG

Institute of Energy, Environment and Economy

Tsinghua University

Email: x-w12@mails.tsinghua.edu.cn

Thanks for your attention!