Cost effectiveness analysis for emission trading mechanisms: A provincial simulation of upcoming five-year plans in China

Abstract This study simulates the total abatement cost (TAC) of CO 2 emissions reduction for province, municipality, and autonomous district with different levels of gross domestic product (GDP) under the egalitarian allocation, sovereignty allocation, ability to pay, and polluter pays principles of an emissions trading policy to achieve five-year plans of 2020, 2025, and 2030 in China. The TACs are estimated by directional distance function, and savings of TAC are compared with and without the implementation of an emission trading policy nationwide. The TAC savings results for the group with low GDP per capita is consistent with that for the whole nation. Sacrificing economic development for provinces with high GDP and medium GDP is required to reach consensus for implementation of the trading policy. From province's standpoint, the sovereignty initial right allocation principle provides incentive for high-GDP-per-capita provinces to join the emissions trading mechanism for its consistency with the nation. Under such a circumstance, a subsidy policy is necessary along with the emissions trading mechanism to give less developed provinces incentives to join the emissions trading array.