Duopoly with Limited Rationality in Carbon Market: A Comparison of Carbon Quota Trading and Carbon Tax System

Abstract

China has established a nationwide carbon quota trading market. Drawing upon international experiences and the strategic vision of the Chinese government, it is anticipated that China will soon incorporate a carbon tax system. I have employed the term “futurescape” to describe a hypothetical future scenario where China’s carbon quota trading market and carbon tax system may evolve in parallel. This term is used to emphasize the anticipation and envisioning of potential future circumstances, particularly when discussing the possibility of two different carbon emission management systems – the carbon trading market and the carbon tax system – being implemented concurrently. In this context, “futurescape” represents a forward-looking and strategic perspective, helping to convey predictions and considerations about future policy trends. It not only enhances the depth of exploration into potential future policy options in my research but also indicates the foresight and innovativeness of the study. This paper constructs a repeated oligopoly game model to juxtapose equilibrium points under both carbon trading and tax regimes. Through rigorous analysis, it is discerned that under a duopoly with bounded rationality and inelastic pricing, if the carbon tax is set referencing the clearing price of the carbon market, then both the carbon trading and tax regimes can achieve identical emission reduction outcomes. Stemming from this revelation, for regions with established inelastic, oligopolistic carbon markets, it would be prudent to manage emission sources not included in the carbon market by setting a carbon tax in line with the market’s clearing emission price. Furthermore, measures might be considered to dismantle such oligopolistic dominance to enhance emission reduction efficiency or to transition from the carbon market to a tax regime for cost-efficient administration. For regions yet to embrace a carbon pricing mechanism, if there is an anticipation of forming an oligopolistic and inelastic carbon market, given the lower administrative costs, diminished enterprise operational risks, and broader coverage of the carbon tax regime, the region should gravitate toward the carbon tax system as a priority.

Received: 30 August 2023 | Revised: 30 October 2023 | Accepted: 12 November 2023

Conflicts of Interest 

The author declares that he has no conflicts of interest to this work.

Data Availability Statement

Data are available from the corresponding author upon reasonable request.

Author Contribution Statement

Yu Chang: Conceptualization, Methodology, Validation, Formal analysis, Data curation, Writing - original draft, Writing - review & editing.