Potential integration of Chinese and European emissions trading market: welfare distribution analysis

A new paper has found that the European Union (EU) and China would both see benefits if their respective ETSs were integrated. The analysis shows that China’s welfare would improve through the “net gain of selling the [carbon] allowance”. In comparison, the EU would face lower abatement costs by purchasing more permits from China, allowing the region to improve its competitiveness, the paper says. According to Dr Sigit Perdana from the École Polytechnique Fédérale de Lausanne, a co-author of the paper, the study is the first to analyse the welfare effects of the potential integration for each EU member state. He tells Carbon Brief the assessment reveals that EU countries with highly energy-intensive industries would benefit the most, while others would face opposite effects. He adds: “We also find that limiting the trade quota to 40% is the optimum level, as it captures most of the welfare gain coming from CO2 trading for the EU.”