Capacity Permit Trading Scheme, Economic Welfare and Energy Insecurity: Case Study of Coal Industry in China

Abstract

Cutting the overcapacity in coal industry is a current critical issue in China and is a matter for the world. However, inappropriate capacity cut policies may induce huge fluctuations of energy price, creating a threat to energy security and even economic stability. This paper designs a capacity permit trading scheme to minimize the compliance cost of production capacity cut, and proposes the operational details of capacity permit trading scheme using China’s coal industry as an example. We also construct a simple partial equilibrium model to examine the benefits and firm behaviors when adopting the permit trading scheme. The results demonstrate that the permit trading scheme will generate an overall positive social welfare as well as reduce firms’ cheating incentives. The results confirm that the more heterogeneous the firms are in terms of compliance costs, the higher will be the social welfare gains and the trade volume. Our findings show that the proposed permit trading scheme is feasible and beneficial in achieving the capacity cut target in China.

Evolution of future world coal consumption: insights from a distribution dynamics approach

“…Lastly, economic and market mechanisms should be adopted to facilitate the phaseout of coal from both supply and demand sides. Some recent studies show that a capacity permit and its trading system can significantly minimize the costs of cutting coal production capacity (Shi et al, 2019, Shi et al, 2020a. On the supply side, a…”

Explaining the slow progress of coal phase-out: The case of Guangdong-Hong Kong-Macao Greater Bay Region

“…In 2017, the National Energy Administration released the 13 th Five-Year Plan on Energy Development, which re-affirms the country's commitment to squeezing out coal's share in energy mix and replacing it with non-fossil fuels and gas (Ma, 2017). In addition, several central policies have also been introduced as an integral part of the wider 'supply-side structural reform', aimed at reducing the excessive production capacity of coal (Shi et al, 2019;Shi et al, 2020;Wang et al, 2020b).…”

A permit trading scheme for facilitating energy transition: A case study of coal capacity control in China

“…The ICPs can be traded among firms in unit as small as one ICP. A detailed discussion of how such a capacity permit trading system might operate is presented in Shi et al (2019).…”

“…The current practice of reducing capacity through administratively closing mines may not be efficient. Given the similarity between capacity cut and emission control, a permit trading scheme is considered to be useful to achieve the capacity control goal with higher efficiency than the administrative measures (Shi et al, 2019). However, there is no empirical study to quantify the benefit of such a market instrument.…”