Evaluating and optimizing environmental tax, carbon trading scheme and renewable portfolio standard in China: An E-DSGE model.

ABSTRACT

In the pursuit of multifaceted objectives encompassing energy, environment, and climate considerations, a prevalent phenomenon across various nations is the simultaneous implementation of diverse policies. These policies may exhibit synergies that mutually reinforce each other, while also entailing the risk of policy failure. This study constructs an environmental dynamic stochastic general equilibrium (E-DSGE) model to evaluate and optimize the policy mix in China, incorporating the environmental tax (APT), carbon emission trading scheme (CET), and renewable portfolio standard (RPS). Regarding policy evaluation, we observe that (1) the effective range of both CET and RPS decreases with the increasing intensity of other policies; for instance, with RPS at 18% and APT at 3 CNY/kg, the CO2 emission cap must be below 93.56%; (2) all three policies exhibit automatic stabilizer functions, and policy failure weakens their stabilizing effects, resulting in a reduction in welfare. Concerning policy optimization, we observe that (1) from a static perspective, the optimal tax rate is 32.68 CNY/kg, the optimal CO2 emission cap is 66.62%, and the optimal renewable energy proportion is 62.4%; (2) from a dynamic perspective, the optimal tax rate, quantity of CO2 quota (or CO2 emission cap), and renewable energy proportion all exhibits pro-cyclical patterns.