A Permit Trading Scheme for Capping Issues in Energy Transition: Case Study of Coal Capacity Control in China

The energy transition often includes capping policies on fossil fuel production or consumption but little attention in the literature has been paid to introduce a permit trading scheme to minimize the cost of such a cap. In this paper, we propose a permit trading mechanism for capping issues and apply this proposal to studying China’s coal capacity control. Theoretically, we argue that the benefits of such a trading scheme comes from rescuing high-efficiency mines being administratively closed and relocation of capacity from lower to higher efficiency mines. Using a non-parametric frontier method and more than 1100 firm-level data merged from financial data and capacity data, we estimated the benefits from a capacity permit trading could lead to more than 30% input saving and additional 26% income boost. The results also demonstrate that the economic benefits rise in a larger trading zone and the permit trading is a Pareto improvement for all participated province when compared with command and control policy. The study suggests that adopting permit trading schemes for capping policies is economically beneficial and politically feasible, and a large trading zone is preferred to a small one. Such permit concept could be used to facilitate energy transition in other countries.