Undermined Climate Policies:A Study on the Impact of Regulatory and Financial Discrimination across Heterogeneous Firms in China

Discussion Papers

No.622

by Weiqi TANG, Bo MENG , Libo WU and Yu LIU

November 2016

ABSTRACT

Firms in China within the same industry but with different ownership and size have very different production functions and can face very different emission regulations and financial conditions. This fact has largely been ignored in most of the existing literature on climate change. Using a newly augmented Chinese input–output table in which information about firm size and ownership are explicitly reported, this paper employs a dynamic computable general equilibrium (CGE) model to analyze the impact of alternative climate policy designs with respect to regulation and financial conditions on heterogeneous firms. The simulation results indicate that with a business-as-usual regulatory structure, the effectiveness and economic efficiency of climate policies is significantly undermined. Expanding regulation to cover additional firms has a first-order effect of improving efficiency. However, over-investment in energy technologies in certain firms may decrease the overall efficiency of investments and dampen long-term economic growth by competing with other fixed-capital investments for financial resources. Therefore, a market-oriented arrangement for sharing emission reduction burden and a mechanism for allocating green investment is crucial for China to achieve a more ambitious emission target in the long run.

Keywords: emissions, CGE, firm heterogeneity, SME, ETS, Chinese economy
JEL classification: C67, C68, Q54, Q56, O16

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