Carbon policy in a high-growth economy: The case of China

There is widespread concern that a stringent international climate agreement will not be reached because it would imply too high costs for fast growing economies. To test this hypothesis we develop a general equilibrium model with fully endogenous growth and estimate the policy cost for China. The framework includes disaggregated industrial and energy sectors, endogenous innovation, and sector-specific investments. We find that the governmental target of a 65 percent carbon intensity reduction until 2030 causes a welfare reduction of 0.5 percent for China, compared to the business-as-usual scenario. Costs of carbon policy for China under an internationally coordinated emission reduction amount to 4 percent of total welfare. We highlight that lower economic growth, faster energy technology development, and stronger induced innovation reduce welfare losses significantly. Increased urbanization raises the policy costs because urban households consume more energy and energy intensive goods.