In Copenhagen climate conference China government promised that China would cut down carbonintensity 40e45% from 2005 by 2020. CET (carbon emissions trading) is an effective tool to reduceemissions. But because CET is not fully implemented in China up to now, how to design it and itspotential impact are unknown to us. This paper studies the potential impact of introduction of CET onChina’s power sector and discusses the impact of different allocation options of allowances. Agent-basedmodeling is one appealing new methodology that has the potential to overcome some shortcomings oftraditional methods. We establish an agent-based model, CETICEM (CET Introduced China ElectricityMarket), of introduction of CET to China. In CETICEM, six types of agents and two markets are modeled.We find that: (1) CET internalizes environment cost; increases the average electricity price by 12%; andtransfers carbon price volatility to the electricity market, increasing electricity price volatility by 4%. (2)CET influences the relative cost of different power generation technologies through the carbon price,significantly increasing the proportion of environmentally friendly technologies; expensive solar powergeneration in particular develops significantly, with final proportion increasing by 14%. (3) Emissionbasedallocation brings about both higher electricity and carbon prices than by output-based allocationwhich encourages producers to be environmentally friendly. Therefore, output-based allocation wouldbe more conducive to reducing emissions in the Chinese power sector.
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