## 1. Impacts of Existing and Projected Climate Change (wpiea2022142-print-pdf)

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### A. Key health and emissions facts
- 1.2 million premature deaths in China in 2019, with coal, petroleum products, and gas accounting for 78, 20, and 2 percent of these deaths respectively.  
- GHG emissions in China grew 275 percent between 1990 and 2018.  
- Energy-related CO2 emissions accounted for 76 percent of China’s 12.5 billion tons of GHG emissions in 2018.  
- By fuel, combustion of coal, oil products, and natural gas accounted for 80, 13, and 7 percent of energy-related CO2, respectively.  
- Power generation/district heating accounted for 42 percent of China’s GHGs in 2018.  
- China’s CO2 emissions are projected under a BAU scenario to increase by 39 percent from 2018 to reach 18.7 billion tons in 2030.  
- China’s consumption of coal in 2019 exceeded the amount consumed by the rest of the world combined.  
- Nearly 70 percent of China’s power generation is from coal, 3 percent from gas, and hydro, nuclear, wind, and solar accounted for 17, 4, 5, and 2 percent, respectively.  
- Electricity consumption by sector in 2018: industry 76 percent, households 14 percent, transportation 2 percent, other 9 percent.

### B. Global mitigation context and China’s objectives
- Global requirement: CO2 emissions need to be reduced by 30-60 percent below BAU levels in 2030 to get on track with 1.5-2oC.  
- Current mitigation pledges (even if fully implemented) would cut global emissions by 1/3 of what is needed for 1.5oC and 2/3 of what is needed for 2oC.  
- China commitments:
  - President Xi Jinping announced commitment to net-zero CO2 emissions by 2060 on September 22, 2020.  
  - Previously announced CO2 emission peaking before 2030.  
  - "1+N" policy framework: “1” overarching plan; “N” sectoral plans to follow.  
  - 14th Five-Year Plan (2021-2025) binding targets:
    - 13.5 percent reduction for energy intensity between 2021-2025,  
    - 18 percent reduction of CO2 intensity of GDP between 2021-2025,  
    - Forest coverage rate improvement from 23.4% in 2020 to 24.1 percent in 2025.  
- Observations: announced targets indicate a slow near-term start with heavy lifting left until after 2030; absence of absolute caps on coal use risks higher near-term emissions and steeper future adjustments.

### C. China’s ETS and carbon pricing context
- National ETS launched in 2021 applies to 2,225 entities in the power and district heating sector with emissions above threshold; covers about 40 percent of China’s CO2 emissions in initial phase.  
- Reported allowance trading prices since opening in July 2021 have been hovering at around $6-8 per ton.  
- Government intends phased extension to cement and aluminum next, then iron and steel, nonferrous metals, petroleum refining, chemicals, pulp and paper, and aviation (coverage up to about 70-80 percent).  
- Structural features reducing cost-effectiveness:
  - Intensity-based benchmarks linked to production levels; ex-post adjustments; higher benchmarks for coal plants; allowance awards tied to output and load factors; coal plants required only to cover emissions up to 20 percent above benchmark allocations.  
- Power sector institutional features weakening mitigation responses: administrative dispatch and pricing, multi-year contracts, limited interprovincial trading, lack of reliable transmission lines, and large share of coal plants owned by SOEs.  
- Comparative prices: EU ETS prices have risen above US $90 per ton; Canada announced minimum carbon price rise to US $135 per ton by 2030.

### D. Fuel tax and effective carbon tax equivalents (2020)
- Coal excise effectively equivalent to $3-4 per ton of CO2 for power and industrial coal consumption.  
- Natural gas tax equivalent to $70 per ton of CO2 (but gas accounts for only 5 percent of economy-wide CO2 emissions in the tax context).  
- Gasoline and diesel taxes equivalent to $168 and $65 per ton of CO2, respectively.  
- Local air pollution damages from coal are around 25 times the current tax.

### E. IMF-ENV model and policy scenarios analyzed
- Model: IMF-ENV, a global dynamic computable general equilibrium (CGE) model calibrated to China; disaggregated into 10 regions and 55 sectors; vintage capital stocks and bilateral trade flows.  
- Four principal policy scenarios (all compared to BAU baseline):
  - Base action: All countries implement carbon pricing consistent with 2030 NDCs and move towards net zero GHG emissions in 2050; Chinese GHG emissions “peak” around 2028 and reach net zero by 2060 (model calibrated to net zero by 2050 with continuation to 2060). Power system retains market imperfections; broader economy remains investment-oriented.  
  - Earlier CO2 emission peak (in 2023): frontloads decarbonization; cumulative emissions set similar to base action but frontloaded.  
  - Power market reforms: adds market-based power sector pricing and dispatch to the early-peak scenario (spot markets, short-term trading, upgraded transmission).  
  - Economic rebalancing: structural shift from investment-heavy to consumption-led growth; investment share of GDP decreases by about 15 percentage points over 2020-2050; private consumption share increases; services expand; reduces energy and carbon intensity.

### F. Principal simulation results and quantitative insights
- Rebalancing and combined policy mixes cut decarbonization costs and support high-quality growth: adopting frontloaded mitigation, effective carbon pricing, power market reforms, and rebalancing can almost halve deviations in average annual GDP cost relative to BAU.  
- Economic rebalancing alone can reduce carbon emissions by about 15 percent over the next three decades.  
- Base action scenario (late peak ~2028):
  - Average annual deviation in real GDP relative to BAU is almost 5 percentage points across 2022-2050, and around 11 percentage points between 2041-2050.  
  - Carbon price starts lower but rises steeply after 2028.  
- Early emissions peak (peak in 2023):
  - Average annual deviation from BAU across entire period is about 3.4 percentage points of GDP.  
  - Early peak reduces abatement cost and required shadow price of carbon compared to later peak.  
- Power market reforms reduce the shadow price of carbon needed for a similar net-zero path by enabling better price pass-through and demand response.  
- Layered policy scenarios (early peak + power market reform + rebalancing) yield progressively lower average GDP costs and lower required shadow carbon prices relative to BAU and base action.  
- Distributional finding: poorer households are disproportionately affected by carbon pricing under all policy scenarios; revenue recycling can offset adverse effects.

### G. Scenario comparisons and aggregate costs (selected quantitative statements)
- Early emissions peak scenario:
  - Aggregate cost is "1.4 percentage points lower than in the base action scenario."  
  - Much lower abatement cost during the last decade of the reduction effort of "almost 4 percentage points of GDP."  
  - Difference in cost for 2030 is "only around 0.2 percentage points."  
- Early peak + Power Market Reforms:
  - For 2022-2050, average annual deviation in real GDP from BAU decreases by "almost 1 percentage point from the early peak scenario" and "a little over 2 percentages points compared to the base action scenario."  
- Early peak + Power Market Reforms + Economic Rebalancing (combined policy mix):
  - Compared to base action, average deviation in real GDP from BAU over the entire time period is "more than halved," representing "a reduction of over 3 percentage points."  
  - Combined mix can "reduce the GDP costs of more than 7 percentage points compared to that in the base action scenario for 2041-2050."  
  - The 2040 carbon price in the base action scenario is "almost three times as high as the carbon price reflective of the combination of early peak, power market reform and rebalancing scenario."  
- Aggregate adjustment cost under full policy with rebalancing: "Around 2.3 percent in 2040" GDP deviation relative to BAU.  
- Rebalancing alone implies a "15 percent" reduction in CO2 emissions after three decades; fall in global CO2 emissions around "4.5 percent" relative to non-rebalancing.

### H. Sectoral impacts in full policy scenario with rebalancing (2040 comparisons)
- Value added changes:
  - Fossil fuel extraction and transformation sectors decline by "more than 40 percent."  
  - EITE industries (chemicals, iron and steel, non-metallic minerals) and construction are most affected.  
  - Electricity sector expands non-fossil power; non-fossil fuel power generation replaces almost entirely fossil fuel power generation in 2040.  
  - Public services (education and health) expand relative to baseline; transport services relying on fossil fuels are negatively impacted despite electrification.  
- Employment reallocation:
  - Construction and fossil fuel sectors lose substantial employment fractions; EITE industries employment in 2040 is lower than today; non-fossil fuel power sector employment increases; service sectors gain employment.

### I. Distributional analysis and revenue recycling (quantitative examples)
- Direct electricity price impacts: "0.14-0.55 percent of consumption over 2020-2030," especially for lower income households.  
- Revenue recycling illustrative example:
  - Use "85 percent" of carbon tax revenues for labor tax reductions and "15 percent" for cash transfers targeting the bottom "25 percent" of households.  
  - Under this example:
    - All reforms become progressive and pro-poor.  
    - Lower income households are better off on net by "around 2 to 7 percent of pre-policy consumption."  
    - Cash transfers could add "from 10 to 13 percent of total consumption" to the poorest rural households, making net effect "7-10 percent of consumption."  
    - Impact on poorest urban households would be "around 3 to 5 percent of total pre-policy consumption."

### J. Modeling caveats and uncertainties
- IMF-ENV may overestimate long-run decarbonization costs because it does not endogenously generate radical future technological innovations (hydrogen, carbon capture and storage, direct air capture).  
- It may underestimate short-run costs by assuming near-perfect competition in many markets and frictionless labor mobility.  
- Projections after 2035-2040 are highly speculative; disruptive technologies and uncertain cost trajectories could materially alter outcomes.  
- GDP cost estimates include reallocations, adjustments, and employment changes and therefore differ from pure abatement cost estimates.  
- Shadow price projections and cost estimates are sensitive to assumptions about technology development and carbon revenue use.

### K. Policy implications and recommended package (core elements)
- Frontload mitigation (earlier emissions peak) to reduce aggregate adjustment costs and technological risks of delay.  
- Strengthen carbon pricing instruments and widen coverage while addressing ETS design inefficiencies (move away from intensity-based benchmarks, limit output-linked allowance allocations, tighten cap-setting).  
- Implement power market reforms to enable price pass-through, interprovincial trading, spot markets, and improved transmission to integrate renewables and enhance cost-effectiveness.  
- Pursue economic rebalancing toward consumption-led growth to lower investment intensity, shift activity to services and high value-added goods, reduce energy and carbon intensity, and lower decarbonization costs.  
- Use carbon pricing revenues to protect vulnerable households—illustrative revenue use: "85 percent" for labor tax reductions and "15 percent" in cash transfers to the bottom "25 percent" can offset adverse distributional impacts.  
- Sequence policies to capture co-benefits and technological spillovers early, reducing long-run abatement costs and risks.  
- Improve ETS: extend beyond power, consolidate benchmarks into absolute emissions cap commensurate with earlier peak, or implement a price floor rising steadily aligned with mitigation objectives; auction permits and recycle revenues.  
- If institutional reforms are uncertain, combine ETS with a progressive increase in the coal tax as an additional channel to reduce CO2 and local air emissions.  
- Strengthen green finance: improve data collection and disclosure, align green bond issuance to international standards, and adopt stronger prudential policies for climate risk.

### L. Appendix highlights: climate impacts, ETS design, model structure, and sectoral policies (selected numeric details)
- Appendix 1 (climate impacts):
  - Heat waves: already about five times more likely with 1.2oC warming; at 2oC frequency increases to 14 times as likely.  
  - Droughts: severe droughts now about 70 percent more frequent; at 2oC will occur between two and three times as often.  
  - Flooding: frequency of heavy downpours has increased by about 30 percent; heavy downpours contain about 7 percent more water.  
  - Sea level rise: even if warming kept below 2oC, projected rise 2-3 meters by 2300; with greater warming 5-7 meters by 2300.  
- Appendix 2 (ETS design numeric details):
  - ETS came into effect on 1 February 2021; trading commenced July 16, 2021.  
  - Coverage: 2,225 power sector entities; inclusion threshold: annual CO2 emissions at least 26,000 tons in any year 2013-2019.  
  - 2021 cap expected to be 30 percent of nationwide GHGs, or over 4,000 billion tons of CO2.  
  - Benchmarks (tons CO2 per MWh): 0.877 (<300 MW coal), 0.979 (>300 MW coal), 1.146 (unconventional coal), 0.392 (natural gas).  
  - Allowance allocations = 70 percent of entities' 2018 output × benchmark factor; adjusted to 2019/2020 output later.  
  - Opening allowance price $7.41 on July 16th 2021; closed trading price $7.89.  
  - Offsets: up to 5 percent via CCER projects.  
  - Reporting failures fines: between $1,449 and $4,347. Compliance failures fines: $2,898-$4,347.  
  - Other rules: gas-fired plants do not face compliance obligations; plants obligated to surrender allowances covering up to 20 percent of verified emissions above free allocation received.  
- Appendix 3 (IMF-ENV model numeric/configuration details):
  - GTAP V10 database: 141 countries and 65 commodities; version 10 based on 2014 data.  
  - Distinguishes between 55 sectors; main GHG-contributing sectors modeled separately (four fossil fuel goods; eight power generation sectors; five EITE industries).  
  - Five countries modeled individually: China, USA, Australia, Japan and India; remaining countries grouped into five aggregate regions (included EU).  
- Appendix 5 (Other sectoral policy illustrations with numeric examples):
  - Transport feebate illustration: feebate price $500 per ton CO2 → subsidy of $5,000 for NEVs and tax of $5,000 for vehicle with 200 grams CO2/km.  
  - Power sector: under $50 carbon price in China in 2030, carbon pricing + market reforms account for about 88 percent of CO2 reductions below BAU in power sector; the other 12 percent from reduced electricity demand. Cost-effective generation mix in 2030 under $50 carbon price: 48 percent coal, 15 percent hydro, 3 percent nuclear, 9 percent solar, and 12 percent wind.  
  - Feebate for generation at $50 per tonne CO2: fees equivalent to 6.6 and 0.2 cents per kWh for coal and natural gas generation, respectively; subsidy of 4.8 cents per kWh for renewables.  
  - Fugitive emissions: 95 percent of fugitive emissions in China are from coal mining. A price of $50 per ton CO2e from fugitive emissions would apply charges equivalent (prior to mitigation) of approximately $7 per ton of coal.  
  - Buildings: direct household fuel combustion accounts for 4 percent of GHG emissions; including indirect residential electricity consumption increases this share to 12 percent.

_Italic: Source — IMF staff analysis from wpiea2022142-print-pdf._

### 1.   Impacts of Existing and Projected Climate Change____________________________________________________ 30

### 1. Impacts of Existing and Projected Climate Change

### A. Introduction
- Climate mitigation in China is critical to ensuring the durability of its long-term development path.
- China is especially vulnerable to rising extreme weather events and its warming rate is outpacing the global average.2
- Higher temperatures have:
  - a direct effect on productivity,
  - a strong link to more frequent and extreme weather events that pose risks to economic growth, health, livelihoods, food security, water supply, and human security,
  - disproportionate impacts on the vulnerable (see Appendix 1).
- Local air pollution from fossil fuel combustion caused an estimated (text truncated in source).

### Figures and Tables (listed in source)
- Figures include:
  - 1. Global Energy-Related CO2 Emissions Pathways
  - 2. Historical GHG Emissions
  - 3. Carbon Intensity of GDP, Selected Countries
  - 4. GHG Emissions by Sector and Fuel Type, 2018
  - 5. China’s Newly Added and Retired Coal-Fired Capacity by Year, GWh
  - 6. Illustrative Efficiency Frontier
  - 7. ETS Trading Prices and Volumes
  - 8. Selected (National and EU Level) Carbon Pricing Schemes in 2021
  - 9. Aggregate Demand and Current Account
  - 10. CO2 Emission Paths by Policy Scenario
  - 11. Abatement Costs by Policy Scenario and Time Range
  - 12. Carbon Price by Policy Scenario
  - 13. Rebalancing vs. Non-Rebalancing: CO2 Emissions Projections
  - 14. Changes in Sectoral (title truncated in source)
  - 15. Changes in Sectoral Composition
  - 16. Mean Effect on Consumption Deciles, before Revenue-Recycling by Policy in 2030
  - 17. Mean Effect on Consumption Deciles, after Revenue-Recycling by Policy in 2030
  - 18. Mean Consumption Effect on Consumption Deciles, after Revenue-Recycling using Cash Transfers, by Policy in 2020
- Tables include:
  - 1. Effective Carbon Tax Rates in China, 2020

*Source: wpiea2022142-print-pdf - 1.   Impacts of Existing and Projected Climate Change — IMF*

### 1.2 million premature deaths in China in 2019, with coal, petroleum products, and gas accounti ng for

### wpiea2022142-print-pdf - 1.2 million premature deaths in China in 2019, with coal, petroleum products, and gas accounti ng for

### Key health and emissions facts
- 1.2 million premature deaths in China in 2019, with coal, petroleum products, and gas accounting for 78, 20, and 2 percent of these deaths respectively.  
- Greenhouse gas (GHG) emissions in China grew 275 percent between 1990 and 2018.  
- Energy-related CO2 emissions accounted for 76 percent of China’s 12.5 billion tons of GHG emissions in 2018.  
- By fuel, combustion of coal, oil products, and natural gas accounted for 80, 13, and 7 percent of energy-related CO2, respectively.  
- Power generation/district heating accounted for 42 percent of China’s GHGs in 2018.  
- China’s CO2 emissions are projected under a BAU scenario to increase by 39 percent from 2018 to reach 18.7 billion tons in 2030.  
- China’s consumption of coal in 2019 exceeded the amount consumed by the rest of the world combined.  
- Nearly 70 percent of China’s power generation is from coal, 3 percent from gas, and (carbon-free) hydro, nuclear, wind, and solar accounted for 17, 4, 5, and 2 percent, respectively.  
- Electricity consumption by sector in 2018: industry 76 percent, households 14 percent, transportation 2 percent, other 9 percent.

### Global mitigation context
- At the global level, CO2 emissions need to be reduced by 30-60 percent below “business-as-usual” (BAU) levels in 2030 to get on track with containing warming to 1.5-2oC.  
- Even if fully implemented, current mitigation pledges would only cut global emissions by 1/3 of what is needed for 1.5oC and 2/3 of what is needed for 2oC.

### China’s climate objectives and policy framing
- President Xi Jinping announced commitment to net-zero CO2 emissions by 2060 on September 22, 2020.  
- China previously announced CO2 emission peaking before 2030.  
- China’s "1+N" policy framework: “1” overarching plan across ministries and sectors; “N” sectoral plans to follow.  
- 14th Five-Year Plan (2021-2025) binding climate targets:  
  - 13.5 percent reduction for energy intensity between 2021-2025,  
  - 18 percent reduction of CO2 intensity of GDP between 2021-2025,  
  - Forest coverage rate improvement from 23.4% in 2020 to 24.1 percent in 2025.  
- The announced targets indicate a slow near-term start with heavy lifting left until after 2030; absence of absolute caps on coal use risks higher near-term emissions and steeper future adjustments.

### Existing mitigation initiatives and carbon pricing
- National ETS launched in 2021 applies downstream to 2,225 entities in the power and district heating sector with emissions above a threshold; covers about 40 percent of China’s CO2 emissions in its initial phase.  
- Reported allowance trading prices since opening in July 2021 have been hovering at around $6-8 per ton.  
- Government intends to extend ETS coverage to cement and aluminum next, followed by iron and steel, nonferrous metals, petroleum refining, chemicals, pulp and paper, and aviation (which would extend coverage up to about 70-80 percent).  
- Structural features of China’s ETS and power sector reduce cost-effectiveness: intensity-based benchmarks linked to production levels, ex-post adjustments, higher benchmarks for coal plants, allowance awards tied to output and load factors, and coal plants required only to cover emissions up to 20 percent above benchmark allocations.  
- Institutional power sector features that weaken mitigation responses: administrative dispatch and pricing, multi-year contracts, limited interprovincial trading, lack of reliable transmission lines, and large share of coal plants owned by SOEs.  
- Comparative carbon pricing context: many national schemes have greater coverage and higher prices; EU ETS prices have risen above US $90 per ton; Canada announced minimum carbon price rise to US $135 per ton by 2030.

### Fuel tax and effective carbon tax equivalents (2020)
- Coal excise effectively equivalent to $3-4 per ton of CO2 for power and industrial coal consumption.  
- Natural gas tax equivalent to $70 per ton of CO2 (but gas accounts for only 5 percent of economy-wide CO2 emissions in the tax context).  
- Gasoline and diesel taxes equivalent to $168 and $65 per ton of CO2, respectively.  
- Local air pollution damages from coal are around 25 times the current tax.

### Policy scenarios analyzed (IMF-ENV model)
- Modeling tool: IMF-ENV, a global dynamic computable general equilibrium (CGE) model calibrated to China and disaggregated into 10 regions and 55 sectors, with vintage capital stocks and bilateral trade flows.  
- Four principal policy scenarios (all compared to BAU baseline):  
  - Base action: All countries implement carbon pricing consistent with 2030 NDCs and move towards net zero GHG emissions in 2050; Chinese GHG emissions “peak” around 2028 and reach net zero by 2060 (model calibrated to net zero by 2050 with continuation to 2060). Power system retains market imperfections; broader economy remains investment-oriented.  
  - Earlier CO2 emission peak (in 2023): Intensifying decarbonization sooner to achieve smoother adjustment and lower GDP costs while reaping earlier technological spillovers. Cumulative emissions set similar to base action but frontloaded.  
  - Power market reforms: Adds market-based power sector pricing and dispatch to the early-peak scenario to allow better pass-through of carbon prices and improve efficiency (spot markets, short-term trading, upgraded transmission).  
  - Economic rebalancing: Adds a structural shift from investment-heavy to consumption-led growth; in the model, investment share of GDP decreases by about 15 percentage points over the next three decades (2020-2050), with private consumption share increasing and services expanding; rebalancing reduces energy and carbon intensity of output.

### Principal simulation results and insights
- Rebalancing and combined policy mixes cut decarbonization costs and support high-quality growth: adopting frontloaded mitigation, effective carbon pricing, power market reforms, and economic rebalancing can almost halve the deviations in average annual GDP cost relative to BAU.  
- Economic rebalancing alone can help reduce carbon emissions by about 15 percent over the next three decades.  
- Base action scenario (late peak around 2028): average annual deviation in real GDP relative to BAU is almost 5 percentage points across 2022-2050, and around 11 percentage points between 2041-2050—reflecting compressed late-decade adjustment costs. Carbon price starts lower but rises steeply after 2028.  
- Early emissions peak scenario (peak in 2023): average annual deviation from BAU across the entire period is about 3.4 percentage points of GDP; earlier peak reduces abatement cost and required shadow price of carbon compared to later peak.  
- Power market reforms reduce the shadow price of carbon needed for a similar net-zero path by allowing better price pass-through and demand response.  
- Layered policy scenarios (early peak + power market reform + rebalancing) yield progressively lower average GDP costs and lower required shadow carbon prices relative to BAU and the base action scenario.  
- Distributional analysis (incidence of carbon pricing): poorer households are disproportionately affected by carbon pricing relative to wealthier households under all policy scenarios. An illustrative revenue-recycling example using 85 percent of carbon tax revenues for labor tax reductions and 15 percent for cash transfers targeting the bottom 25 percent of households offsets negative welfare impacts and can support poverty reduction and reduce regional inequalities.

### Modeling caveats and uncertainties
- Model limitations: IMF-ENV may overestimate long-run decarbonization costs because it does not endogenously generate radical future technological innovations (e.g., hydrogen, carbon capture and storage, direct air capture); it may underestimate short-run costs by assuming near-perfect competition in many markets and frictionless labor mobility.  
- Projections after 2035-2040 are highly speculative; disruptive technologies and uncertain cost trajectories could materially alter outcomes.  
- GDP costs differ from pure emission-abatement or economic-efficiency costs because GDP effects include reallocations, adjustments, and aggregate employment changes.  
- Shadow price projections and cost estimates are sensitive to assumptions about technology developments and the use of carbon pricing revenues.

### Policy implications and recommended elements of a comprehensive package
- Frontload mitigation (earlier emissions peak) to reduce aggregate adjustment costs and technological risks of delay.  
- Strengthen carbon pricing instruments and widen coverage while addressing current ETS design inefficiencies (move away from intensity-based benchmarks, limit outputs-linked allowance allocations, tighten cap-setting).  
- Implement power market reforms to enable price pass-through, interprovincial trading, spot markets, and improved transmission to integrate renewables and enhance cost-effectiveness.  
- Pursue economic rebalancing toward consumption-led growth to lower investment intensity, shift activity toward services and high value-added goods, reduce energy and carbon intensity of output, and lower the overall cost of decarbonization.  
- Use carbon pricing revenues to protect vulnerable households—illustrative revenue use: 85 percent for labor tax reductions and 15 percent in cash transfers to the bottom 25 percent can offset adverse distributional impacts and support inequality and poverty reduction.  
- Sequence policies to capture co-benefits and positive technological spillovers early, reducing long-run abatement costs and risks.

*Italic: Source — IMF staff analysis from wpiea2022142-print-pdf.*

### 1.4 percentage points lower than in the base action scenario. The difference is mostly driven by the

### wpiea2022142-print-pdf - 1.4 percentage points lower than in the base action scenario. The difference is mostly driven by the

### Scenario comparisons and aggregate costs
- Early emissions peak scenario:
  - Aggregate cost is "1.4 percentage points lower than in the base action scenario."
  - Much lower abatement cost during the last decade of the reduction effort of "almost 4 percentage points of GDP."
  - Difference in cost for 2030 is "only around 0.2 percentage points."
- Early peak + Power Market Reforms:
  - For 2022-2050, the average annual deviation in real GDP from the BAU baseline decreases by "almost 1 percentage point from the early peak scenario" and "a little over 2 percentages points compared to the base action scenario."
  - Carbon price associated with adding power market reform is lower than in the base action and early peak scenarios.
- Early peak + Power Market Reforms + Economic Rebalancing (combined policy mix):
  - Compared to the base action scenario, the average deviation in real GDP from the BAU baseline over the entire time period is "more than halved," representing "a reduction of over 3 percentage points."
  - The largest reduction occurs in the last decade: the combined policy mix can "reduce the GDP costs of more than 7 percentage points compared to that in the base action scenario for 2041-2050."
  - The 2040 carbon price in the base action scenario is "almost three times as high as the carbon price reflective of the combination of early peak, power market reform and rebalancing scenario."

### Power market reforms
- Reforms ensure a market-based setting of pricing and quantities and:
  - Increase incentives for consumers to lower overall energy demand and fossil fuel-based energy sources.
  - Lead to increasing investments into renewables.
  - Implementing the national ETS in the power sector with improved price signals to final consumers yields further efficiency gains and cost reductions.

### Economic rebalancing (role and impacts)
- Definition in simulation:
  - Assumes a reduction of "15 percentage points" in the investment share of GDP and an increase of similar magnitude in the consumption share of GDP, with the current account trending towards zero.
  - Path of GDP growth kept constant across rebalancing and non-rebalancing scenarios to isolate impact.
- Emissions and global effects:
  - Rebalancing alone can translate into a "15 percent" reduction in CO2 emissions after three decades under the given assumptions.
  - The fall in global CO2 emissions would be around "4.5 percent" compared to the non-rebalancing scenario.

### Sectoral impacts (full policy scenario with rebalancing)
- Aggregate adjustment cost:
  - "Around 2.3 percent in 2040" GDP deviation relative to BAU.
- Value added changes (2040, full policy vs baseline):
  - Emission-intensive sectors grow less quickly; low-carbon sectors benefit from changed incentives.
  - Value added in fossil fuel extraction and transformation sectors decline by "more than 40 percent."
  - Energy-intensive sectors (EITE industries — chemicals, iron and steel, non-metallic minerals) and construction are most affected by carbon policy and rebalancing.
  - Electricity sector benefits via added renewable energy and grid improvements; non-fossil fuel power generation expands to replace almost entirely fossil fuel power generation in 2040.
  - Publicly provided services (education and health) expand relative to baseline; transport services that rely on fossil fuels are negatively impacted despite electrification.
- Employment reallocation (2040, full policy vs baseline):
  - Construction and fossil fuel sectors lose substantial fractions of employment relative to today.
  - Total EITE industries employment in 2040 is projected lower than today; some declines would have occurred under baseline due to structural and demographic changes.
  - Employment in non-fossil fuel power sector increases markedly.
  - Service sectors increase employment as they are labor intensive and benefit from rebalancing.

### Distributional analysis and household incidence
- Method:
  - Uses the Carbon Pricing Assessment Tool (CPAT): two-step approach via input-output to calculate carbon pricing effects on consumer goods, then mapping to household budget shares using household expenditure surveys embedded in CPAT.
- Regressivity and channels:
  - Results show poorer households tend to be disproportionately affected by carbon pricing (impact tends to be regressive).
  - Direct electricity price impacts are sizable: "0.14-0.55 percent of consumption over 2020-2030," especially for lower income households.
  - Indirect effects (price increases of general consumption goods due to higher energy costs in industries) are relatively larger but distributionally-neutral.
- Revenue recycling effects:
  - Revenue recycling can offset negative impacts and make reforms pro-poor.
  - Example: If "85 percent" of carbon tax revenues were used on general labor tax reduction and "15 percent" on targeted cash transfers for the bottom "25 percent" of households:
    - All reforms would become progressive and pro-poor.
    - Lower income households would be better off on net by "around 2 to 7 percent of pre-policy consumption."
  - Regional equity via cash transfers:
    - Cash transfers might add "from 10 to 13 percent of total consumption" to the poorest rural households, bringing net effect of the reforms to "7-10 percent of consumption."
    - Impact on the poorest urban households would be "around 3 to 5 percent of total pre-policy consumption."

### Policy implications and recommended instruments
- Core package to increase efficiency and reduce mitigation costs:
  - (i) an earlier emissions peak, (ii) power market reforms, and (iii) economic rebalancing.
  - Package should include improving and expanding the national ETS, complementary power market reforms, and macroeconomic policies to shift toward consumption-based growth.
- ETS improvements and alternatives:
  - Improve national ETS by extending beyond power, consolidating benchmarks into an absolute emissions cap commensurate with an earlier peak, or implementing a price floor rising at a steady state aligned with mitigation objectives.
  - Auction allocation permits and recycle revenues via transfers to compensate vulnerable households and invest in green development.
  - If institutional reforms are uncertain, combine ETS with a progressive increase in the coal tax as an additional channel to reduce CO2 and local air emissions.
- Power sector market reforms:
  - Allow generators to adjust quantity and electricity prices more freely to demand and supply to enhance ETS effectiveness.
- Economic rebalancing policies:
  - Address high savings and high investment rates.
  - Greater fiscal support for strengthening social protection to reduce precautionary savings and facilitate consumption-led inclusive growth.
  - Shift fiscal support composition away from traditional brown infrastructure toward vulnerable households.
  - Gradual, orderly transition of the real estate sector toward sustainable growth to support rebalancing.
- Complementary measures:
  - Sectoral mitigation instruments such as revenue-neutral feebates across sectors as less efficient but potentially more politically acceptable alternatives to carbon pricing.
  - Revenue redistribution from auctioning allowances and instruments like a coal tax can make reforms progressive and pro-poor; assist vulnerable households, workers, and provinces to ensure a just transition.
- Financing and green finance:
  - Decarbonization requires large financing for renewables, grid updates, and abatement technologies.
  - Chinese authorities signal need to leverage green finance, expecting significant private sector mobilization.
  - Measures to strengthen green finance: improving data collection and disclosure, aligning green bond issuance to international standards, and stronger prudential policies for climate risk to support financial stability and green credit allocation.
  - Credible climate policies can help attract green finance.

### Concluding remarks
- A comprehensive strategy combining early emissions peak, power market reforms, and economic rebalancing is necessary to transition to carbon neutrality while ensuring high-quality growth.
- Economic rebalancing is a key channel to achieve high-quality growth and climate goals, reducing energy and carbon intensity and easing energy security pressures.
- Future work suggested: more detailed analyses on transitioning out of coal with minimal energy-security disruption, detailed power sector reform implementation to enable interprovincial energy trading and sharing.

*Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022142-print-pdf.pdf*

### References

### References

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### Appendix 1 — Impacts of existing and projected climate change (summary findings)
- Heat waves:
  - Already about five times more likely to occur with existing warming of 1.2oC.
  - At 2oC warming, frequency increases to 14 times as likely.
  - With 2oC of warming, the hottest temperatures would reach nearly 3oC higher than previous heat waves.
- Droughts:
  - Severe droughts that used to occur an average of once per decade are now occurring about 70 percent more frequently.
  - If warming continues to 2oC, these droughts will occur between two and three times as often.
- Flooding:
  - Frequency of heavy downpours has already increased by about 30 percent.
  - Heavy downpours contain about 7 percent more water.
- Hurricanes:
  - A higher percentage of storms are reaching categories 3, 4 and 5 in recent decades; this is expected to continue as temperatures climb.
- Sea level rise:
  - Even if warming is kept below 2oC, sea levels are projected to rise 2-3 meters by 2300.
  - With greater warming, sea levels projected to rise by 5-7 meters by 2300.
  - By 2100, once-in-a-century coastal flood events will occur at least once per year at more than half of coastlines across the world.
- Weather whiplash:
  - Increased incidence of wild swings between dry and wet extremes (example: California atmospheric rivers and subsequent drought).
- Source: IPCC (2021).

### Appendix 2 — China’s ETS: design details (key details and numeric values preserved)
- Trading Periods:
  - ETS came into effect on 1 February 2021 and on July 16, 2021 trading commenced.
  - Currently there are no defined trading periods; current regulations apply only to the 2019 and 2020 compliance period.
- Coverage:
  - 2,225 power sector enitites, including combined heat and power, as well as captive power plants of other sectors.
  - Inclusion thresholds: Entities with annual CO2 emissions at least 26,000 tons in any year from 2013-2019.
  - Only CO2 is included.
  - Coverage will later include petrochemicals, chemicals, building materials, steel, nonferrous metals, paper, and domestic aviation, though there is currently no timeline for this expansion.
- Emissions Cap:
  - The cap is calculated as the sum of total allowance allocations to covered entities.
  - The 2021 cap is expected to be 30 percent of nationwide GHGs, or over 4,000 billion tons of CO2.
- Allowance Allocation:
  - Four benchmarks for free allowance allocation expressed in tons CO2 per MWh:
    - 0.877 for conventional coal plants producing less than 300 MW;
    - 0.979 for conventional coal plants producing more than 300 MW;
    - 1.146 for unconventional coal plants;
    - 0.392 for natural gas plants.
  - Allowance allocations equal 70 percent of entities' 2018 output multiplied by the respective benchmark factor.
  - Allocation will be adjusted to actual 2019 and 2020 output later.
  - A load correction factor can allocate additional allowances for entities running at less than 85 percent of capacity.
- Auctions:
  - Allocation is done through free allocation though legislation provides for the possibility of auctioning in the future.
- Carbon Price:
  - Opening allowance price of $7.41 on July 16th 2021 and closed with a trading price of $7.89.
- Banking and Borrowing:
  - Expected to allow banking but not borrowing (rules not yet established).
- Market Stability Provisions:
  - Adjustment mechanisms, risk prevention, and control mechanisms are being developed to constrain irregular price fluctuations and avoid market manipulations.
- Offsets:
  - Entities can offset up to 5 percent of their emissions using the China Certified Emissions Reduction (CCER) projects.
- Monitoring and Enforcement:
  - Entities must submit the previous year’s emission reports by the end of March.
  - Reporting failures fines: between $1,449 and $4,347.
  - Compliance failures fines: $2,898-$4,347.
  - Gas-fired plants do not face compliance obligations.
  - Other plants are obligated to surrender allowances covering up to 20 percent of verified emissions above the free allocation received.
  - Gaps between compliance obligation and foregone allowances will be deducted from the following year.
- Institutions Involved:
  - Chinese Ministry of Ecology and Environment (MEE) supervises the ETS; Provincial level MEE subsidiaries organize verification and implementation; Shanghai Environment and Energy Exchange (SEEE) operates the trading platform; municipal-level authorities have some local management duties.
- Sources: ICAP (2021a, b), WBG (2021).

### Appendix 3 — IMF-ENV CGE model (structure, features, and numeric details)
- Model type and data:
  - Recursive dynamic neo-classical, global, general equilibrium model.
  - Central input: GTAP V10 database.
  - Database contains country-specific input-output tables for 141 countries and 65 commodities and real macro flows.
  - Version 10 is based on data from 2014.
- Core mechanics:
  - Solved as a sequence of comparative static equilibria.
  - Factors of production are exogenous for each time step and linked between time periods with accumulation expressions (Solow-style).
  - Output production uses nested constant-elasticity-of-substitution (CES) functions.
  - International trade modeled with “Armington” specification using full set of bilateral flows and prices by traded commodity.
  - Primary factors of production are not mobile across countries.
- Factor markets and dynamics:
  - Capital market characterized by real rigidities; labor market is not.
  - Vintage capital stocks: new investment flexible across activities; old capital mostly fixed and cannot be reallocated without costs.
  - Labor and land can shift across sectors with no adjustment cost until wages (land prices) equalize; labor (land) supply responds with some elasticity to changes in net-of-taxes wage rate (land price).
- Emissions and environmental linkage:
  - Emissions linked either with fixed coefficients (e.g., fuel combustion) or with emission intensities that decrease nonlinearly with carbon prices—Marginal Abatement Cost (MAC) curves.
  - Very long run may overestimate decarbonization costs because radical technology innovations (hydrogen, second generation nuclear and biofuel technologies, carbon capture and storage) are not included due to lack of cost information at industrial scale.
- Uses:
  - Scenario analysis projecting up to 2050 a consistent set of economic, sectoral, trade-related, and environmental variables (greenhouse gases and air pollutants).
  - Quantitative policy assessment for transitions to a low carbon economy and costs/benefits of policy instruments to reach GHG emission reduction targets.
- Sectoral and regional detail:
  - Distinguishes between 55 sectors.
  - Main GHG-contributing sectors modeled separately: four fossil fuels goods; eight power generation sectors; five Energy-Intensive and Trade Exposed (EITE) industries.
  - Five countries modeled individually: China, USA, Australia, Japan and India.
  - Remaining countries grouped into five aggregate regions (included EU).
- Note: GTAP URL referenced: https://www.gtap.agecon.purdue.edu/

### Appendix 4 — Distributional analysis outcomes by scenario (figures summary)
- Figures present mean consumption effect on consumption deciles in 2030:
  - Figure A1: Before revenue-recycling by policy (% Change in Household Consumption Relative to Pre-Policy) — scenarios referenced: Rebalancing, Power market reform, Early peak, Base action.
  - Figure A2: After revenue-recycling by policy in 2030 (% Change in Household Consumption Relative to Pre-Policy) — assumes 15 percent of revenues used for a cash targeted transfer (targeting bottom 25 households with a 90 percent coverage and 10 percent leakage rate) and 85 percent for reducing labor taxation.
  - Figure A3: After revenue-recycling using cash transfers, by urban and rural population (% Change in Household Consumption Relative to Pre-Policy) — assumes 15 percent of revenues used for a cash targeted transfer (targeting bottom 25 households with a 90 percent coverage and 10 percent leakage rate).
- Source for calculations: IMF Staff calculations.

*Content unit: wpiea2022142-print-pdf - References (extracted from the supplied PDF content).*

### Appendix 5. Other Sectoral Policies

### Appendix 5. Other Sectoral Policies

### Transportation
- China prioritizes electric and other low carbon vehicles; carbon pricing or higher road fuel taxes alone have limited effectiveness due to modest impacts on retail fuel prices and public resistance.
- China met its goal of one million new electric vehicles (NEVs) sold by 2018 (two years ahead of schedule).
- Manufactures are required to progressively increase NEV share in new vehicle sales to 25 percent by 2025 and 40 percent by 2030; previous consumer subsidies for NEV purchases are phasing out due to high fiscal costs.
- Fuel economy standards for light- and heavy-duty commercial vehicles introduced starting in 2021 (averaged across manufacturers’ sales fleets); the light vehicle standard for 2025 is 4 liters per 100 km, or 90 grams CO2 per km.
- Sales-share mandates and fuel economy requirements can be incompatible: higher NEV sales shares may allow manufacturers to offset fuel savings by increasing sales of low fuel-economy vehicles and still meet average fuel economy requirements—this motivates consideration of a feebate addition.
- Proposed revenue-neutral feebate integrated into the 10 percent vehicle purchase tax: fee = CO2 price × [CO2/km ─ CO2/km of the new (industry-wide) vehicle fleet] × [average lifetime vehicle km].
  - Emission rate data by model type can be inferred from data used to administer fuel economy standards.
  - Feebate advantages:
    - Promotes continuous behavioral responses: always a reward (lower taxes or higher subsidies) for switching to lower-emission vehicles.
    - Cost effective: reward proportional to emission-rate reduction.
    - Maintains approximate revenue neutrality as average emission rate in formula is updated.
- Illustration: a feebate with a price of $500 per ton of CO2 would provide a subsidy of $5,000 for NEVs and apply a tax of $5,000 to a vehicle with 200 grams CO2/km.
- Subsidies for NEVs would decline over time as average fleet emission rate declines and cost differentials narrow (e.g., battery improvements).

### Power Generation
- Cost-effective complementary instruments should exploit all behavioral responses to reduce emissions intensity: (i) shift from coal to gas; (ii) shift from coal and gas to renewables; (iii) shift to nuclear and fossil plants with CCS (excluded from IMF staff modelling); and (iv) efficiency improvements reducing coal/gas per kWh.
- Carbon pricing promotes all responses and, with market reforms, combined these responses account for about 88 percent of CO2 reductions below BAU in the power sector under a $50 carbon price in China in 2030; the other 12 percent comes from reductions in electricity demand.
- Cost-effective generation mix in 2030 under $50 carbon price (IMF staff calculations): 48 percent coal, 15 percent hydro, 3 percent nuclear, 9 percent solar, and 12 percent wind.
- Regulations or fiscal incentives that only promote renewables (e.g., feed-in tariffs) address a narrower set of responses and do not reduce electricity demand.
- Feebate for SOEs: fee = CO2 price × [CO2/kWh ─ pivot point CO2/kWh] × electricity generation.
  - Provides incentives across any response that lowers average emission rates; reduces fees for plants below pivot point and increases fees for plants above pivot point.
  - Efficient allocation of responses is promoted (with market reforms) since each extra ton of CO2 cut yields the same benefit.
  - Feebates can be approximately revenue neutral if pivot point reflects recent economy-wide average emission rate; pivot point trajectory can be set exogenously to preserve revenue neutrality.
  - Implementation capacity minimal—generation emissions already monitored under China’s ETS.
- Illustration: a feebate with price $50 per tonne CO2 would apply fees equivalent to 6.6 and 0.2 cents per kWh for coal and natural gas generation, respectively, while providing a subsidy of 4.8 cents per kWh for renewables. Fees for coal would increase and subsidies for renewables decline as pivot point is updated over time.

### Industry
- Energy-intensive trade-exposed (EITE) industries (steel, chemicals, metals, cement, glass, paper) generate most industrial GHGs in China, but currently lack major de-carbonization policies.
- As the ETS is extended to industry, measures are needed to address international competitiveness impacts.
- Feebates could complement carbon pricing to reinforce incentives to reduce emission rates per unit of output without reducing output:
  - Firm fee = [CO2 price] × [CO2/output ─ industry-wide average CO2/output] × [firm output].
  - Applies to emissions from fuel combustion and process emissions (e.g., clinker conversion in cement).
  - Avoids first-order allowance purchase requirement on average producers (they pay no charge on remaining emissions), alleviating competitiveness concerns relative to schemes charging remaining emissions.
  - Scheme can build off existing industrial emissions monitoring procedures under the ETS.

### Buildings
- Direct coal, oil, and gas combustion in homes accounts for 4 percent of China’s GHG emissions; including indirect emissions from residential electricity consumption increases this share to 12 percent.
- Energy reductions in buildings possible via: improved insulation, cleaner/more efficient heating equipment (including electric heating), energy-efficient lighting and appliances, digitalization/smart homes, renewable-based water heating systems.
- Feebate schemes could complement existing measures:
  - Example feebate for appliances: fee = CO2 price × CO2 per unit of energy × [energy consumption per unit ─ industry-wide energy consumption per unit] × number of units.
    - For refrigerators, energy consumption rate = kWh per cubic foot cooled; number of units = cubic feet.
  - Similar feebate could tax fossil-fuel heating systems in existing buildings and subsidize electric heat pumps to accelerate transition to zero-carbon heating in pre-existing buildings.
  - Feebates could be linked to energy performance of new buildings to encourage energy-saving investments.

### Fugitive Emissions from Coal Extraction
- 95 percent of fugitive emissions in China are from coal mining; main source is venting of methane.
- Potential abatement measures: methane recovery for pipeline injection or on-site power generation, flaring (convert methane to less potent CO2), catalytic or thermal oxidation of ventilation.
- Pricing schemes could promote full range of responses; apply default emission rates with rebates for demonstrated lower emission rates.
  - Emissions monitoring technologies currently provide discrete measurements at limited sites (satellites, aircraft, drones, remote sensing from vehicles) but are improving.
  - Fuel suppliers might be taxed based on a default leakage rate with rebates to firms demonstrating lower leakage via mitigation and continuous monitoring systems.
  - Fugitive emissions occur within Chinese borders and therefore should be priced regardless of whether coal is sold domestically or exported.
  - Pricing approaches are more flexible and cost-effective than uniform mandates.
- Illustration: a price of $50 per ton on CO2 equivalent from fugitive emissions would apply charges equivalent (prior to mitigation) of approximately $7 per ton of coal.

### Forestry
- Nationwide forestry and land use policies should promote: (i) reducing deforestation; (ii) afforestation; and (iii) enhancing forest management (planting larger trees, fertilizing, tree thinning, increasing rotation lengths).
- Expanded forest coverage yields co-benefits: reduced water loss risk, reduced floods, reduced soil erosion, reduced river siltation.
- Current Chinese policies focus on recovering native forests, protecting ecologically sensitive zones, and banning trade in illegal logs, but patchwork efforts risk leakage and forest clearance elsewhere—underscoring need for nationwide approach.
- National feebate program for land parcels (especially agricultural/forestry boundary) could cost-effectively promote all responses for increasing carbon storage without fiscal cost:
  - Fee = [CO2 rental price] × [carbon storage on the parcel of land in a baseline period ─ stored carbon in the current period].
  - Rewards all three channels via reduced fees or increased subsidies, unlike afforestation subsidies which reward only one channel.
  - Periods can be averages over multiple years to account for lumpy carbon storage changes.
  - Feebates can be designed via appropriate baseline scaling over time to be revenue-neutral in expected terms.
  - Feebates would involve rental payments rather than large upfront payments because changes in carbon storage may not be permanent (e.g., due to fires).
  - Rental payments should equal carbon price × interest rate × number of years in a period.
  - Carbon price must rise over time to provide ongoing increases in carbon storage.
  - Partial exemptions from fees may be warranted for timber harvested for wood products because emissions are delayed until end of product life.

*Italic: Source — Appendix 5. Other Sectoral Policies (wpiea2022142-print-pdf)*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022142-print-pdf.pdf_