The Influence of Different Allowance Allocation Auction Ratios on China's Power Supply Structure: A System Dynamics Approach

Carbon emissions trading helps to internalize the environmental and social costs of carbon emissions and is one of the key solutions to mitigate the climate change challenge and environmental pollution. As the world's biggest emitter of CO₂, China has been actively promoting carbon emissions trading. Following several years of regional pilot markets, in December 2017 China announced its long-awaited national Emission Trading Scheme (ETS) which will first start with power sector. Using system dynamics approach, this paper explores the likely impacts of the auction ratios of carbon allowance allocation on China's power supply structure to provide policy insights for designing the scheme details in the coming years. First, a system dynamics model is built to establish the correlation between carbon market and power market. Then parameters of variables are set and data are processed in the model, and Vensim software is used to simulate the relationship between the variables under four scenarios of auction ratios, i.e., 0%, 5%, 50% and 100%. The results show that whilst auction ratio has great impacts on renewable energy generation, it has little impacts on conventional energy generation.