How can China's power sector reform reduce carbon emissions? A long-term competition perspective

Challenges coexist with opportunities for achieving carbon neutrality through power sector reform. Based on the ongoing reform in China and generator-level data in 2019, we identify three channels through which the reform could affect carbon emissions. We analyze the theoretical mechanisms under a long-term average cost competition framework, evaluate the emission reduction potentials of the three channels, explore the obstacles in achieving these potentials, and propose corresponding solutions. We find the following: (1) By reshaping the generation competition between high-efficiency and low-efficiency coal-fired generators, the reform has the potential to reduce carbon emissions by 205.4 million tons. However, considering the high financial costs of high-efficiency generators, realizing the full potential is difficult. (2) Administrative promotion of renewable energy could reduce carbon emissions by 311 million tons, but with large implicit expenses, which makes the promotion unsustainable. (3) The price dividend induced by the reform could increase carbon emissions by 98.1 million tons. To achieve emission reduction potentials in the first two channels and offset the rebound effect in the third channel, we propose explicitly pricing carbon. Without other supporting measures, a carbon price of over 400 Chinese yuan per ton of carbon dioxide is essential for the reform to eliminate barriers to its implementation.