Dynamic interactive effect and co-design of SO₂ emission tax and CO₂ emission trading scheme

To solve the different environmental problems caused by the over-use of fossil fuels, multiple environmental policies currently coexist. How these environmental policies interact with each other and how to optimise them are a few issues that need to be resolved urgently in practice. We established an environmental dynamic stochastic general equilibrium model (E-DSGE) to analyse the dynamic interactive effects of the SO₂ emission tax and CO₂ emission trading in China and the optimal design of these two environmental policies. We have calibrated the model based on China's actual data. The results indicate that synergistic emission reduction effects have led to an overlap between the two policies, because both SO₂ and CO₂ emissions share a common root—fossil fuels. Currently there is no obvious conflict between them. When the SO₂ emission tax is levied at 12.6 CNY/kg, the CO₂ emission cap should be lower than 76.1%. Second, the synergistic emission reduction effect between CO₂ emission trading and the SO₂ emission tax can enhance the automatic stabilisation function of both. Third, we suggest to optimise both policies pro-cyclically. However, if either of these two policies is ineffective, the optimal SO₂ emission tax will be counter-rather than pro-cyclical.