Design and impact assessment of policies to overcome oversupply in China's national carbon market.

ABSTRACT

China has adopted a national carbon emissions trading market to promote emission reductions, but until now, overallocation of allowances suffer low carbon prices and thus to unfulfilled emission reduction goals. We report a general equilibrium modeling that indicates the flexible compliance and price adjustment mechanism of the carbon market, along with explores the solution to the oversupply of allowances in the China's national carbon market. We find that, under the current policy, the initial loose allowance allocation decreases the overall carbon price, and simultaneously the total amount of banked carbon allowances reaches 4.880 billion tons in 2030, resulting in the level of carbon price cannot achieve NDC (Nationally Determined Contribution) targets. However, by introducing carbon market price adjustment schemes, we observe that the cumulative amount of allowances can effectively reduce, enabling the carbon price rising. Importantly, the amount of the supply of allowances decreases most under the benchmark decrease scenario, which increases the emission reduction pressure of the enterprises from the beginning, leading to the largest economic losses, the price-based adjustment mechanism raises the carbon price to expected level at the minimize economic losses, and the quantity-based adjustment mechanism is more sensitive to policy parameters compared to the price -based adjustment mechanism. These findings offer a promising avenue for selecting cost-effective price adjustment mechanism to improve price mechanism design for national carbon markets.