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Intensity-based Quota Allocation Reduces the Transaction Costs for Carbon Markets

May 21, the 3rd Energy Transition Forum of International Society for Energy Transition Studies (ISETS) and Wen Lan Forum was held in Wuhan, China (online). This Forum was organized by ISETS and the School of Finance, Zhongnan University of Economics and Law. Professor JI Qiang, ISETS Vice-President, from the Institutes of Science and Development of Chinese Academy of Sciences (CASISD), is one of the chief organizers. Professor SUN Xiaolei and Associate Professor XIA Yan from CASISD, also participated.

The Forum attracted more than 150 participants from 30 Chinese and oversea universities and institutes, including the Chinese Academy of Sciences, University of Chinese Academy of Sciences, University of Technology Sydney, etc. Scholars had in-depth discussions on the theme of climate finance and investment.

Professor FAN Ying, dean of the School of Economics and Management, Beihang University, presented the keynote speech “Welfare analysis of quota mechanisms based on volume and intensity in carbon markets”.

FAN pointed out that the intensity-based quota allocation may reduce the welfare losses caused by market forces, which would bring more social welfare than the volume-based quota way, when the marginal cost of production in an enterprise with low emissions is not exceeding that in a firm with high emissions.

She further indicated that the intensity-based quota way can achieve higher consumer surplus, producer surplus and social fare than the quota way on volume in the context of equal total emission allowances, taking into account the Chinese steel industry. These findings bring forward crucial implications on the carbon market.  

Associate Professor XIA Yan, as a discussant in the session, contended that the renewable energy quota system is a basis institution in energy markets, whereby the government of a country or region makes mandatory regulations on the market share of renewable energy through legal means.

The quota system is a top-level design to promote the development of the renewable energy industry. Quota system and green certificate as its complementary, to a certain extent, reduce the transaction costs of renewable energy. On the one hand, green certificate transactions can distinguish the commodity attribute from the environmental attribute of renewable power, and promote green electricity consumption by way of marketization. The synchronous circulation of green certificate and green electricity materializes, which provide a flexible approach of quota, and promote the digestion and absorption of renewable energy. On the other hand, it is conducive to the formation of a unified market-oriented electricity price and the realization of the optimal allocation of renewable energy across the country.

ISETS Forum is the main brand of ISETS open to global stakeholders and aims to provide a high-level dialogue and academic exchange platform for energy transition with global influences.