How to auction carbon emission allowances? A dynamic simulation analysis of spatiotemporal heterogeneity

Abstract

There is notable variability in carbon emission reduction efforts across different provinces in China, underscoring the need for effective strategies to implement carbon emission allowance auctions. These auctions, as opposed to free allocations, could be more aligned with the principle of “polluter pays.” Focusing on three diverse regions — Ningxia, Beijing, and Zhejiang — this study employs a system dynamics simulation model to explore markets for carbon emissions and green certificates trading. The aim is to determine the optimal timing and appropriate policy intensities for auction introduction. Key findings include: (1) Optimal auction strategies differ among the provinces, recommending immediate implementation in Beijing, followed by Ningxia and Zhejiang. (2) In Ningxia, there’s a potential for a 6.20% increase in GDP alongside a 21.59% reduction in carbon emissions, suggesting a feasible harmony between environmental and economic objectives. (3) Market-related policy variables, such as total carbon allowances and Renewable Portfolio Standards, significantly influence the optimal auction strategies but have minimal effect on carbon auction prices.

Graphical abstract

Keywords

carbon allowances / carbon allowance auctions / carbon emissions trading / Renewable Portfolio Standard / system dynamics

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