Climate policy interactions: Capturing game signals in carbon markets

Abstract

The sequential rollout of diverse climate policies by national and local governing bodies has sparked a series of concerns regarding their efficacy and long-term impact. These policies function either as constraints or incentives within the carbon market eco-trading system. This study aims to bridge gaps in quantitative analysis of climate policy interactions by employing the Stackelberg game model to explore various policy mix and their impacts on both national and regional conditions. It explored the effects of seven types of policy packages (including reduction targets, free allowance allocations, guideline prices, and their mixed scenarios) on regional and national economic growth and decarbonization targets. Moreover, fine-grained example analyses based on China's carbon markets were used to capture these win-win signals. The results show that: (1) when accounting for regional disparities, a waterbed effect emerges, implying that no scenario can simultaneously achieve both accelerated net profit growth and significant emission reductions across all regions. (2) Interactions among climate policies may yield strengthening, overlapping, or weakening effects compared to the business-as-usual scenario. However, it is crucial to note that these effects typically exhibit an inverse relationship between net profit growth and emission reductions. (3) Carbon trading prices act as public signals that assist policymakers in determining the Stackelberg-Nash equilibrium points to pursue optimized net profits under emission constraints. Hence, policymakers are encouraged to embrace comprehensive, sustainable solutions, ensuring ongoing monitoring and timely policy adaptations that strike a balance between economic growth and emission reduction regarding regional disparities.