Carbon tax vs. carbon market: Which one could better help China’s coal-based electricity industry achieve carbon neutrality?

Abstract This paper aims to investigate which carbon pricing mechanism, carbon tax or carbon market, could better promote the carbon neutrality of China’s coal-based electricity industry that indeed exerts significant impacts on climate change and industrial prosperity. By building a stochastic electricity price model, we reveal the price shock of both carbon tax and carbon market under different carbon pricing goals. Our key empirical results are as follows. First, both carbon tax and carbon market could significantly trigger the price volatility of coal-based electricity industry, while the shock impact of carbon market on such industry’s carbon emission is more significant than that of carbon tax. Second, by both carbon pricing mechanisms, carbon emission could be reduced up to 20%, and a key premise of achieving this goal is keeping carbon price at the level of 100 yuan/ton. Third, the volatility range of electricity price, which is policy-led, could not manifest the incentive impact of economic instruments on carbon emission reduction of coal-based electricity industry. Further, policy allows the upper limit of floating electricity price up to 15%. In general, we straighten out the linkage of carbon pricing tools and coal-based electricity costs, thereby constructing a carbon pricing mechanism for coal-based electricity industry to step into China’s carbon neutrality as soon as possible.