Emissions trading and abatement cost savings: An estimation of China's thermal power industry

This study evaluates the efficiency advantage of a market-based emission permit trading policy instrument over a command and control policy instrument in the case of China's thermal power industry. We estimate the unrealized gains achievable through emission permit trading with an optimization frontier analysis. These unrealized gains include potential recoveries of electricity generation through eliminating spatial and temporal regulatory rigidity on emission permit trading. The results of an ex post estimation during 2006 and 2010 indicate a potential gain of 8.48% increase in electricity generation if both the intra- and inter-period regulatory rigidities on CO₂ emission permits trading had been eliminated. In addition, if the permit trading systems for three air pollutions, CO₂, SO₂, and NO_x, had been completely integrated, a positive net synergy effect of 1.43% increase in electricity generation could have been secured. The unrealized gains identified in this study provide supports for establishing a nationwide emission permit trading system in China.