Emission reduction policy: A regional economic analysis for China☆

a r t i c l e i n f o China is under considerable pressure to reduce its CO 2 emissions and has given a public commitment to substantial cuts by 2020. Policy makers are acutely aware of the possible adverse economic consequences of such cuts, and an important part of this issue is the regional dimension—will policy to reduce emissions exacerbate the already large interregional disparities in China, and if so, will some policies be better than others? These issues have received relatively little attention in the literature. We contribute to a better understanding of these issues by exploring the regional economic effects of two sets of policies by which emissions might be reduced: a reduction in the number of permits under a tradable permit system and a subsidy to pollution abatement. We do this in a small two-region theoretical model designed to capture some of the salient features of the Chinese economy and the Chinese tax/expenditure system. We show that there are important regional implications of a national pollution reduction policy and that the preferred policy depends on how disparities are measured, on how the revenue from the sale of permits is spent and on how a subsidy is financed. China's high growth rate in the past 35 years has brought great benefits to the country but these have been accompanied by serious problems. Two such problems will be the focus of this paper, viz., pollution and widening regional disparities. We will argue that these problems are not independent and that, in particular, policies to control emissions may have adverse consequences for regional inequality, consequences that need to be taken into account in the evaluation of alternative policy instruments. The seriousness of the two problems is widely acknowledged. The rapid growth of carbon emissions is claimed to be one important factor, which has contributed to national environmental degradation and which has also spilled over to the global environment. China's carbon dioxide (CO 2) emissions have grown at an average annual rate of 5.8% during the period since reforms began in 1978. In 2008, China overtook the US as the largest single emitter of CO 2 and now accounts for over 25% of world emissions. Moreover, given China's continuing high growth rate, it is safe to predict that its contribution to world emissions will grow for some time. Environmental concerns have stimulated a number of potential policy responses …