Long-term impacts of carbon allowance allocation in China: An IC-DCGE model optimized by the hypothesis of imperfectly competitive market

This study presents the construction of a 14-sector, recursive dynamic CGE model and introduces the hypothesis of imperfect competition as the model's improvement. The novel CGE model (IC-DCGE), which is calibrated with the 2017 social accounting matrix, is used to examine the impact mechanism of free-quota ratios on the economy–energy–environment system. Five simulation scenarios are designed with different free-quota ratios and one BAU scenario as a benchmark. The conclusions drawn from this study are as follows: (i) GDP loss due to the ETS policy is typically underestimated in previous studies using the traditional CGE model with a hypothesis of the perfectly competitive market, and the loss could be alleviated with a high free-quota ratio. (ii) Changes in outputs and commodity prices of the ETS-covered industries are more apparent than those of the remaining industries, and the most conspicuous change occurs in the power industry. (iii) Less free-quota ratios would yield better performance in CO2 mitigation and the optimization of energy structure. Overall, this study suggests that China set a high initial free-quota ratio and gradually decrease it to attain the emission reduction target while decreasing economic losses. •Monopoly structure is incorporated in energy production industries of the CGE model.•GDP losses in previous CGE simulations are usually underestimated.•A lower free quota ratio is more conducive to optimize China's energy structure.