Abstract:

The imbalance of regional emissions is a peculiarity for China’s unified carbon market. However, neither grandfathering method nor benchmarking method can avoid punishing good performers and applying too much pressure on poor performers. By examining existing research on allowance allocation, we found that in China’s carbon market, the grandfathering method faces a dilemma of choosing a fixed-base-year or a rolling-base-year, and the benchmarking method faces a dilemma ofwhether to apply the principle of “one benchmark for one product.” Based on the principle of common but differentiated responsibility for emission reduction, this studyproposeda new method of allowance allocation, that is, grandfathering-benchmarking approaching method. Then, using this method to simulate the allowance allocation and comparing the result with the methods of grandfathering and benchmarking alone,the results show that the grandfathering-benchmarking approaching method not only can avoid punishing good performers and applying too much pressure on poor performers, but also work in coordination with carbon reduction target. Comparing with the other two methods, itsemission control coefficientis fair, the allocation resultis more accurate, and the cost of emission reduction is more acceptable. It has better performance in reducing the risk of worsening regional economic imbalance.The conclusion of the study shows thatgrandfathering-benchmarking approaching methodcan deal with the situation of strong regional emission disparity. It can be used as a reference for the selection and optimization of allowanceallocation method in the initial stage of China’s unified carbon market.

Key words: carbon market, allowance allocation, imbalance of regional emissions, fairness, grandfathering-benchmarking approaching method, China