Case study on initial allocation of Shanghai carbon emission trading based on Shapley value

Abstract Carbon emission trading is an effective measure to reduce greenhouse gas emissions worldwide. China has publicized plans to initiate the demonstration of carbon emission trading in seven regions as of 2013. Initial allocation is fundamental, but it proposes difficulty in the mechanism design of the carbon emission trading system. Benchmark, grandfathering and the Shapley value have been employed to simulate a specific case, which consists of the initial allocation of carbon emission allowances of three power plants in Shanghai, China. The results of the Shapley value are regarded as a theoretical equitable reference. The results of benchmark are similar to those of the Shapley value. However, it is apparent that the allocation regarding grandfathering is inequitable. Considering other factors, we proposed the following: At the introduction of experimental stage, free allocation pertaining to grandfathering can be adopted; meanwhile, benchmark should be prepared and adopted at the appropriate time. Furthermore, a portion of the initial allowances can be reserved for auction, and this portion for auction will escalate to the extent of 100% upon entering the formal stage. In addition, the tiered price mechanism and the subsidy policy are also suggested.