In December 2017, China introduced a national emission trading scheme in contributing to achieve its Nationally Determined Contribution (NDC) set under the Paris Agreement. China’s NDC aims reducing its greenhouse gas (GHG) emission intensity (i.e., CO2 equivalent emissions per unit of GDP) by 60 to 65 percent below 2005 levels (Wu et al., 2017). The recently introduced national emission trading scheme covers only the electricity sector and is expected to extend to other emission intensive sectors in the near future. However, an emission trading scheme would not be able to cover some key sources of GHG emissions such as the transport sector, household sector and government or service sector. Without reducing emissions from those sectors, meeting China’s NDC would be challenging. Since it would be too complicated to cover these sectors through a national emission trading scheme, a carbon tax might be an appropriate instrument to trigger emission reductions in the sectors not covered by the national emission trading scheme. This study compares, using a multi-region, multi-sector CGE model of China, various policy instruments, such as a national emission trading system and a uniform national carbon tax to achieve specified emission reduction targets. It then simulates scenarios combining these policy instruments to investigate if a combination of these policies would be more economic than implemented them in isolation. The study finds that a combination of emission trading and carbon tax would be more economical than these instruments introduced in isolation.
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