Carbon Trading,Carbon Emission Quota Allocation,and Green Transition Risk
Climate change represents a universal challenge confronting humanity,intricately linked to the sustain-ability of the Chinese nation.On July 16,2021,China officially launched its national carbon market for online trading,achieving a total turnover of CNY 7.661 billion during the first compliance cycle.This market is recognized as the largest in the world regarding emissions coverage.However,there exists a notable deficiency in theoretical modeling literature concerning carbon trading policies.This paper develops a dynamic stochastic general equilibrium(DSGE)model incorporating financial friction,pollu-tion externalities,carbon taxation,and market-based carbon trading.After calibrating the policy shock parameters by cal-culation,this paper investigates the macroeconomic impacts of the carbon tax,carbon trading,and differentiated carbon emission quotas policy by analyzing transition risks,the stability of fluctuations,and long-term effects.The findings of this paper are as follows.Firstly,implementing a carbon tax solely on high-emission brown enter-prises may induce significant short-term transition risks.Conversely,when carbon tax policy is designed as partial exemp-tion for brown enterprises and tax subsidy for green enterprises,the transition risks become equivalent to those associated with carbon trading policies,which means the Pigovian tax can be equivalent to Coase's theorem under special design.Secondly,existing literature primarily focuses on restrictions related to carbon emissions while treating marginal costs of emission reduction as comparable to the price of carbon.This perspective neglects that green sectors can sell their emis-sion rights in the carbon trading market to enhance capital returns,thereby underestimating the stabilizing role of carbon trading in mitigating economic fluctuations.Our model analysis indicates that market-based trading systems for emission allowances yield superior outcomes compared to conventional tax policies regarding stabilization efforts.Thirdly,the rela-tionship between initial quotas for carbon trading and social welfare exhibits an inverted U-shape.Lower baseline quotas will exacerbate short-term transformation risks while presenting diminishing marginal benefits in the long term.Optimal policy analysis indicates that the government should set lower baseline carbon quotas to achieve higher transition welfare when financial friction is low.Fourthly,when the government sets emission reduction targets,extended research on dif-ferential initial carbon quotas shows that carbon pricing policy alone cannot reduce transition risks and enhance economic structural transformation simultaneously.The marginal contributions of this paper are primarily reflected in the following aspects.Firstly,this paper integrates carbon tax and market-based trading of carbon emission rights into a DSGE model.Numerical calculations of policy pa-rameters can ensure that both carbon tax and carbon trading can achieve equivalent emission reduction effects.This paper analyzes tax and trading policies from multiple perspectives,including long-term effects,transition risks,stability fluctua-tions,transition welfare analysis,and government welfare loss analysis.This research paradigm and method for calibrat-ing policy parameters may serve as a reference for future studies.Secondly,the findings of this paper indicate that when the design of the carbon tax policy includes subsidies for green enterprises per unit output meanwhile providing brown en-terprises with certain exemptions on carbon emissions credits,the transition risks for carbon tax and carbon trading are equal.However,in response to sectoral technology shocks and shocks related to carbon emission technologies,carbon trading policies can still yield relatively high social welfare,which is contrary to existing literature.Thirdly,our original-ity analysis regarding initial carbon trading quotas with financial friction and the differential baselines for carbon quotas yields significant insights,which will help deepen the understanding of carbon pricing.The results imply that the high-level development of financial markets,effective green structure monetary policy,and green macroprudential policy will help facilitate China's green economic transformation.This can help guide government policies on carbon pricing and ini-tial allocations of emission allowance quotas.Some crucial policy suggestions are proposed as follows.Firstly,the government should scientifically and reasonably set the annual carbon quota plan and consider factors such as the current economic situation and the development of the fi-nancial market to achieve a win-win situation between environmental quality and economic development.Secondly,finan-cial institutions should increase innovation efforts to develop new financial tools and services to address the information asymmetry and product tool shortages for green firms.High-level financial development can promote China's economic transition.Thirdly,if the government attempts to conduct a carbon tax policy,it is recommended to establish a"green in-centive and brown punishment"mechanism,while a certain carbon emission exemption quota should be granted to brown enterprises to avoid the violent green transition risk.The carbon tax rate floating mechanism can generate a"double divi-dend"effect when there are external unexpected shocks such as natural disasters or the COVID-19 pandemic.
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