Regulating Carbon Emission Under Rate-Based Carbon Emission Trading Scheme Through Benchmark Emission Intensity and Carbon Price

For global warming mitigation by carbon emission reduction through rate-based carbon emission trading scheme (RETS), feasible policies require discreet and accurate understanding to the scheme mechanisms and impacts. This paper develops RETS models that integrate cost-effective decision-making of firms and governmental carbon emission reduction targets considering product and carbon trading markets without assuming market clearing for carbon trading. Based on a duopoly Cournot game in the product market, this study generalizes RETS model by three featuring terms: quadratic form of operational cost, supply-demand relations of carbon allowances trading, and adding an environmental abatement cost. The benchmark emission intensity and the carbon price are found to synergistically control carbon emission. They are also feasible for reaching suitable production and profitability levels. An empirical study of two pilot firms from the steel industry in China tests the deduced results, providing more practical framework and recommendations for policy setting. The framework for carbon emission control would suit different regulatory targets