How will natural gas market reforms affect carbon marginal abatement costs? Evidence from China

Abstract

Having recognised the significant role of natural gas in reducing carbon abatement costs, China is rapidly promoting its growth. However, obvious distortions exist in China’s natural gas market, and it is unclear how these may affect abatement policies going forward. Therefore, to assess the effects of energy market distortions on the carbon marginal abatement costs (MACs) in China, this study proposes a computable general equilibrium model for China’s natural gas sector, which considers the monopoly market structure, price regulation, and import restrictions. Results show that deregulation of gas prices will lead to an effective decrease in China’s MACs. China’s MACs are insensitive to liberalisation of the market monopoly or gas import restrictions. When all three distortions are fully deregulated, China’s MACs show an obvious upward trend. Finally, this study uses China's carbon trading policies as an example to propose policy implications under different scenarios of natural gas market reform.