Potential Integration of Chinese and European Emissions Trading Market: Welfare Distribution Analysis

Central to the aims of the Paris Agreement, a multilateral coordinated action through integrated carbon markets has been a practical bottom up option for effective and efficient mitigation. This paper quantifies the welfare effects of potential integration of Emission Trading Scheme (ETS) between the European Union (EU) and China. The analysis is performed up to the year 2040, assessing the economic and welfare impacts for China and 28 EU Member States. Using the European version of the computable general equilibrium model GEMINI-E3, the analytical assessment reveals that integrating trading markets is beneficial for both regions, albeit stronger for the EU. Linking the EU-China trading market decreases welfare cost from abatement to some notable countries with high constitutes of energy-intensive industries such as Poland, Romania and the Czech Republic. A few others, such as the Netherlands and Ireland, face higher welfare cost from negative gain of trade. Limiting the trade quotas up 30 per cent, captures most of the welfare gain coming from CO2 trading for the EU. Further analysis in sectoral level finds that market integration significantly minimizes the loss of competitiveness of European energy-intensive industries and reduces the international leakage. Our finding thus confirms the potential of emissions trading market as an effective instrument to facilitate multilateral coordination in global mitigation.