86
J. Zhou and S. Chang
3.3.2 Mechanism for Stablizing Carbon Prices
Economic theories dictate that prices are jointly determined by supply and demand.
Carbon trading market is unique in that the supply is determined by the government,
and the lack of data and other deficiencies at the outset might often result in a
mismatch between supply and demand. Moreover, economy growth may lead to a
drop in demand for allowance, and the supply should also be reduced accordingly
to maintain price stability. But in reality, the supply dictated by the government has
failed to make timely response and adjustment to the changing needs. In addition,
trading prices are subject to a variety of factors, including differences in the cost of
emission reduction of varied industries, and the size and degree of activity of market
players. Experience in most carbon markets, including EU, has pointed to a surplus
of allowances during economic downturn. Carbon market has proven incapable of
handling such unique “market failure” on its own, and therefore calls for appropriate
government intervention.
Carbon trading prices serve as a signal of all economic activities in the carbon
market associated with emission reduction. Proper carbon prices can boost lowcarbon transition of the economy and enhance incentives in the market. If not, it may
worsen the tensions between economic development and emission reduction. Prior
to the inception of the pilot, Beijing had mulled over the framework design of price
regulation, and has broken new grounds on top of the experience and lessons of EU.
To illustrate, it laid out the plan for allowance revision, price control measures and
the ceiling and floor of prices, setting an example for pricing control in domestic
carbon market.
3.3.2.1 Building Key Scenarios
Carbon market in Beijing should leverage its role of curbing carbon emissions and
keep a close watch on carbon prices, forestalling exorbitant prices and the subsequent
shock on GDP as well as excessively low prices that might risk losing the impact of
internalized emission cost on major emitters.
By the above analysis, allowance allocation schemes devised by the competent authority represent a key issue in carbon price fluctuations. To this end, two
different allocation schemes are selected (see Tables 3.4 and 3.5): moderate allowance
(Scenario S1) and loose allowance (Scenario S2), the former being the actual plan in
Beijing (2013–2015), which has been moderately tightened during the 13th Five-Year
Plan period.
3.3.2.2 Findings
Dynamic CGE model simulation was conducted based on the two scenarios, which
factored in the changes in carbon trading prices, the macro-economy of Beijing,
J. Zhou and S. Chang
3.3.2 Mechanism for Stablizing Carbon Prices
Economic theories dictate that prices are jointly determined by supply and demand.
Carbon trading market is unique in that the supply is determined by the government,
and the lack of data and other deficiencies at the outset might often result in a
mismatch between supply and demand. Moreover, economy growth may lead to a
drop in demand for allowance, and the supply should also be reduced accordingly
to maintain price stability. But in reality, the supply dictated by the government has
failed to make timely response and adjustment to the changing needs. In addition,
trading prices are subject to a variety of factors, including differences in the cost of
emission reduction of varied industries, and the size and degree of activity of market
players. Experience in most carbon markets, including EU, has pointed to a surplus
of allowances during economic downturn. Carbon market has proven incapable of
handling such unique “market failure” on its own, and therefore calls for appropriate
government intervention.
Carbon trading prices serve as a signal of all economic activities in the carbon
market associated with emission reduction. Proper carbon prices can boost lowcarbon transition of the economy and enhance incentives in the market. If not, it may
worsen the tensions between economic development and emission reduction. Prior
to the inception of the pilot, Beijing had mulled over the framework design of price
regulation, and has broken new grounds on top of the experience and lessons of EU.
To illustrate, it laid out the plan for allowance revision, price control measures and
the ceiling and floor of prices, setting an example for pricing control in domestic
carbon market.
3.3.2.1 Building Key Scenarios
Carbon market in Beijing should leverage its role of curbing carbon emissions and
keep a close watch on carbon prices, forestalling exorbitant prices and the subsequent
shock on GDP as well as excessively low prices that might risk losing the impact of
internalized emission cost on major emitters.
By the above analysis, allowance allocation schemes devised by the competent authority represent a key issue in carbon price fluctuations. To this end, two
different allocation schemes are selected (see Tables 3.4 and 3.5): moderate allowance
(Scenario S1) and loose allowance (Scenario S2), the former being the actual plan in
Beijing (2013–2015), which has been moderately tightened during the 13th Five-Year
Plan period.
3.3.2.2 Findings
Dynamic CGE model simulation was conducted based on the two scenarios, which
factored in the changes in carbon trading prices, the macro-economy of Beijing,