Economic Analysis of Carbon Emission Trading

Li Yadong

(School of Economics and Finance Xi’an Jiaotong University，Xi’an Shaanxi710061)

Ⅰ.Economic interpretation of carbon emission trading

1.Essential attribute:commercialization

The traditional mode of production is characterized by high input，low output and high emissions and does not pay attention to the economical use of resources and protection of ecological environment.This production process increasingly makes the environment destructed and the resources depleted，resulting in the ecological cost of economic development gradually increase.Obviously，production with high ecological cost characteristics causes the reduction of economic growth starting factor and the increase of limiting factors;that is，bad ecological environment，shortage of resources and poor quality of resources gradually compress room for economic growth and reduce the potential for economic growth.The very mentality and practices of material productive forces development lead to the backwardness of ecological production，and intensifies the contradiction between ecological civilization and material civilization，which becomes a restricted factor of the present solution to our country’s principal social contradiction and cannot meet people’s growing material needs better even in a long term.〔1〕

To respond to the negative impact of climate change to economic growth，we need to change the past mode of economic development，especially to establish the basic idea of economical use of resources and effectively protect ecological environment，practice the economy development mode of low carbon，gradually increase the efficiency in the use of resources and protect the ecological environment to achieve economic growth and climate change concurrently，and provide strong protection for sustainable human development.

Carbon emission trading policy is to consider carbon emission as a tangible development right based on the utilization of climate and environmental resources.It meets the needs of a country or its citizens’prosperous lives，to give the right the attribute of traded commodity，to buy and sell through market-oriented means among different economic subjects，to achieve the efficient allocation of scarce environmental resources in order to control pollution effectively and to protect environment better so as to improve the welfare of ecological environment of human society.Apparently，once the carbon emissions have the property of commodity，it is necessary to follow the basic principles of market economy when the goods is acquired or transferred，and paid service becomes the basic problem of the economic entities.

Therefore，commercialization is the essential attribute of carbon emission trading.we must promote economic development mode from high carbon to low carbon in market-oriented logic so that adequate amount of resources，high resource quality and beautiful ecological environment become the solid and reliable basis of sustainable economic development，and the balance of material production and ecological production can be acheived effectively.

2.Solution logic:internalizing the externality

When the activities of an economic subject is engaged affects the welfare of another economic subject and neither pay nor get paid to the impact，an externality problem comes into being.〔2〕If this effect is negative，it is negative externalities;if strong，positive externalities.Both positive and negative externality will cause the non effective of market equilibrium.In order to solve the problem，a basic idea is to inter-nalize the externality，namely to levy tax on the items of negative externality and subsidize the ones of positive externality.As far as the choice of public policy is concerned，it is to adopt either order-oriented control or market-based policy.

Because the behavior of economic subject of pollutant discharge will damages the welfare of other economic entities，it results in a negative externality and makes the economic behavior of economic subject for social cost far more than the cost on its own.Following the logic of the internalizing of externality and in viewing of the negative impact on ecological environment and human health caused by discharge of pollutants，the public policy should either be control-oriented，formulating the highest pollution discharge level for the economic subject or require the subject using technology to reduce the amount of pollution;or be market-oriented，levying tax on the economic subject or allowing the trade of pollution emission.

To the economic subject，carbon emission trade policy is set to include the economic behavior of the environmental pollution effects in the category of cost，which makes the subject pay attention to the matching of individual cost and social cost，either bears the ecological cost for the destruction of environment or obtains ecological benefits for the protection of environment.

In this sense，the commodity attribute of carbon emission rights becomes a reference dimension for the economic subject to measure the costs and benefits of its economic behavior so as to make the cost of obtaining carbon emissions or the revenue of transferring carbon emissions inherent in the economic behavior of economic subject.That is，the internalizing of externality becomes the incentive principle for the economic subject to implement carbon emission trading.Furthermore，the economic subject will decide the amount how much carbon emissions can be obtained or transferred according to the costs and benefits of pollutants emission in the market，which will promote the development and perfection of the carbon emission trading market，and make the carbon emission trading a most effective way to improve the welfare of both contracting parties.

3.Efficiency principle:market mechanism

Carbon emission trading takes the commercialization of carbon emission rights as essential prerequisite，the efficient utilization and fair allocation of carbon emissions as the goal，through market-oriented means and takes the price mechanism as the core to ensure the orientation of matching costs and benefits of economic subject to achieve the optimal allocation of carbon emission rights.From this perspective，carbon emission trading centers on the decisive role of market means in carbon emission reduction，which is essentially to take the price of carbon emission trading as signals to let economic subject determine the allocation of various economic resources in production on the basis of the ecological costs and benefits reflected by the signals，to let the owners and users lead economic resources to the most efficient-using places and to achieve the overall consideration of both increase of material wealth and improvement of ecological environment ultimately.

Certainly，a better play of the role of government is the premise of the full play of decisive role of market mechanism in carbon emission trading，which requires the government to focus on the top-level design and supporting security system of the carbon emission trading market on the height of sustainable development of human society.Thus，the formulation and operation of the system of carbon emission trading cannot be separated from the full cooperation of market and government，which makes carbon emission trading an effective means to achieve continued economic growth in response to climate change.

All in all，carbon emission trading is an environment economic policy carried out to avoid the conflict among human，nature and society.The commercialization attribute will urge economic subjects to more concern the optimal allocation of carbon emission;the internalization of the externality will urge them to concern more the matching of ecological cost and benefit;the market mechanism will urge them to improve the utilization efficiency and allocation fairness of carbon emission.The effective operation of carbon emission trading will reduce the quantity while improving the quality of carbon emission during the economic development.Especially for China，a big developing country，effective implementation of the policy of carbon emission trading will overcome the hard constraints of resource environment on economic development so as to improve the quality，expand the space and release the potential of our economic development and then realize positive interaction between economic development and environmental protection.

Ⅱ.Economic effect of carbon emission trading

1.Cost effect and benefit effect

After the implementation of carbon emission trading，the scope of production cost of economic subjects extends.Carbon emission becomes a part of costs like labor force，field and means of production and thus marginal cost of products increases.〔3〕That is because，on the one hand，the expense of obtaining carbon emission adds directly the marginal cost and on the other hand，the implementation of carbon emission also raises the price of energy required in the production activity of economic subjects，which becomes the impetus for increase in production cost.In order to deal with the challenge of the increase in production cost，the producer，as a sensible economic subject，shifts extra cost on to the user based on profit-oriented concept.

Meanwhile，the cost effect of carbon emission trading varies from economic subjects of different technical levels，and thus benefit effect is different.The economic subjects who have advanced technology or high amount of initial allocation of carbon emission will profit a lot through the trade with other economic subjects.On the one hand，advanced technology can reduce the carbon reduction and thus economic subjects can acquire more carbon emission index and profit by selling the rest index.On the other hand，the initial allocation of carbon emission varies from different industries.The industry，which has high amount of initial allocation，can trade with other economic subjects of extra carbon emission index and acquire corresponding profits.So the cost effect of carbon emission trading and benefit effect among various economic subjects show that the commodity attribute and market mechanism of carbon emission urge economic subjects to participate in the allocation of scare environmental resource rationally and utilize and assign the carbon emission based on profit maximization.

Although the implementation of carbon emission trading inevitably adds the production cost of economic subjects in a short term，it brings about the environmental improvement and economical utilization of resource，which reduces the cost of enterprises’pollution treatment a lot and the cost of emission reduction of economic subjects tends to decrease in a long term.So the cost effect and benefit effect are intertemporal.The rising cost in a short run will urge economic subjects to concern the economical utilization of resource and effective environment protection and pursue the organic unity of ecological benefit，economical benefit and social benefit，and in the long term will promote the coordinated development of environment，resource and economy，and then achieve the improvement of ecological environment，economic utilization of resource，sustainable development of economy and growth of ecological environment benefit.

2.Environmental effect

Guided by Productivism，the previous economic activities waste excessive economic resource and destroy good ecological environment.Excessive carbon emission causes global warming and the greenhouse effect harms the human’s ecological welfare.Based on the market principle，carbon emission trading is an economic system which provides economic subjects with economic motivation to perceive and participate in pollution abatement，incited by which the coordination of economic development and environmental protection，efficient allocation of environmental capacity resource and the unification of economic，social and environmental effect are achieved.〔4〕

On the one hand，the economic motivation of carbon emission trading inspires economic subjects with initiative to participate in environmental governance.The system，as the rule of a social game，can reduce the uncertainty within the relationship with each other through establishing an interactional structure，restrict human’s behaviors through clarifying the boundary of economic activities，and maintain a good economic order through a relation of cooperation and competition.〔5〕Unlike traditional command-controlled environmental governance，the system of carbon emission trading makes it possible to purchase or sell carbon emission autonomously and rationally in its own interest.Due to the differences of environmental governance techn-ologies，economic subject will trade and profit on the emission permits.If the profit from the emission trading is higher than the cost of environmental protection，economic subjects will focus on the research and application of environmental protection technology and profit from the extra carbon emission trading.Because of economic motivation，economic subjects focus more on the commodity attribute of carbon emission as well as widely trade with other economic subjects of carbon emission characterized by commodity attribute through technological improvement and application.

On the other hand，the effect of welfare allocation of carbon emission trading promotes the research and application of environmental protection technology.The nature of allocation trading helps economic subjects choose an economic activity that is able to generate net value flow.〔6〕

For economic subjects who participate in the carbon emission trading，trade of carbon emission will promote the increase of their own welfare.Especially nowadays，with the increasing constraint on sustainable economic development imposed by environmental quality，to increase the research and application of environmental protection technology has become a basic consensus of various social economic subjects.In this sense，the research and application of environmental protection technology becomes another channel for economic subjects to expand the source of profits under the condition of global warming，which is more competitive and sustainable with a view to the prospect of sustainable economic development and environmental protection.Thus，once the control object of total discharge of pollutants is clarified，the scarcity of carbon emission permit will be more obvious，the profit of carbon emission trading will be more considerable within the cost constraints of environmental protection and the initiative of economic subject to research and apply environmental protection technology will be inspired，and thus the welfare distribution effect will be more characterized of overall improvement.

All in all，different methods of solving environmental result in the very different environmental governance performances.The system of carbon emission trading enables economic subjects to realize the cost and benefit in relation to themselves and participate in carbon emission trading actively，improving environmental quality at a lower cost of environmental governance and achieving the optimal allocation of rare carbon emission.Especially for the developing countries，carbon emission trading embodies the principle of common but different.The developed countries take historical responsibilities on their environmental pollution on the premise of protecting the development rights of developing countries，so that the developing countries improve carbon emission quality，avoiding the traps of carbon emission quantity.〔7〕Thus，the system of carbon emission trading should be implemented and improved，focusing on ei-ther current or future environmental situation，in order to make the biggest profit at the least cost of ecological environmental governance.

Ⅲ.Suggestions for the perfection of carbon emission trading in China

The above analysis proves the necessity and feasibility of the system of carbon emission trading in improving the ecological environment and increasing the efficiency of resource consumption when dealing with global warming，which avoids the softening of traditional command-controlled environment institution.Thus the government should take effective measures to perfect the carbon emission trading system on the height of ecological civilization construction.

1.Strengthen the top-level design of the carbon emission permits trading

The strategic importance of carbon emission trading should be acknowledged and the top-level design of the carbon emission trading should be strengthened through the systematic thinking.Firstly，push the implementation of carbon emission trading in order and step by step based on explicit overall and stage goals.Secondly，define the fundamental content and construct scientifically the operation mechanism，motivation mechanism and restriction mechanism of carbon emission trading.Thirdly，build a platform for carbon emission trading.Build an integrated platform of carbon emission trading based in China，and meanwhile balance the gap of economic and social development among different cities and provinces so as to highlight the regional qualities of the platform of carbon emission trading.Fourthly，foster the concept of incentive compatibility and promote the cooperation of stakeholders aimed at interest increases.

2.Promote the effective implementation of carbon emission trading

The effectiveness of carbon emission trading should be strengthened to promote the carbon emission trading to be abided by and implemented effectively.Firstly，create a good atmosphere in the entire society for economic subjects to realize the importance of carbon emission trading and abide by related rules actively.Secondly，ensure the rationality of economic motivation of carbon emission permits trading and avoid contorted benefit distribution.Thirdly，give full play to the decisive role of market mechanism in the process of carbon emission trading and prevent the strong government and interest groups from becoming the source of the softening of carbon emission trading.Thus，economic groups should abandon the idea of utilizing or bypassing system gradually，〔8〕so that the rigidity of system will produce a restraining force on them.

3.Perfect the pricing mechanism of carbon emission permits trading

The marketization attribute of carbon emission trading makes the price mechanism an important role in the process of trading.For resource allocation，the price，as a landmark，can deliver information between the owner and user of the resource and provide economic motivation.〔9〕Thus，it is necessary to accelerate the market construction and perfect the pricing mechanism of the carbon emission trading.Firstly，summarize the experiences of seven pilot projects of carbon emission trading，find out the problem，optimize the system design and accelerate and promote the construction of carbon emission trading market.Secondly，establish a unified carbon finance platform and optimize the market structure of spot market，futures market of carbon emission trading and financial derivatives market.Thirdly，perfect the means of payment，contract operation mechanism and risk management mode effectively.And meanwhile build and guide market beyond market based on the various needs of market participants.

4.Strengthen the international cooperation of carbon emission trading

The international cooperation of carbon emission trading should be fully emphasized on the height of the sustainable development of human society.Firstly，learn developed countries’experience of constructing the advanced carbon emission trading market and optimize institutional setup，operation mechanism and motivation mechanism constantly.Secondly，pay attention to the investment in human capital of carbon emission trading market.Experienced managers and operators of the carbon emission trading market should be introduced from developed countries and talents should be sent to developed countries to learn from them.(Translated by Liu Yanzi＆ Dai Jiabao )

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