China-UK Low Carbon College at Shanghai Jiao Tong University, China
Yu H. (2013). The EU ETS and Firm Profits: An Ex-post Analysis of Swedish Energy Firms. Environmental Economics 4(3), 59-71.
Hellström J., Lundgren J., and Yu H. (2012). Why Do Electricity Prices Jump? Empirical Evidence From the Nordic Electricity Market. Energy Economics 34 (6), 1774-1781.
Lump-sum transfers as a means of tackling climate change are mainly perceived as a theoretical construct to achieve the first best Pareto optimum. The previous literature on lump-sum transfers normally focuses on the two polar cases: the absence of lump-sum transfers and the perfect or unconstrained lump-sum transfers leaving the middle way aside. In this paper, we attempt to explore the unmarked part by developing a model with transfer costs explicitly taken into account. We show that whether the first best Pareto optimum characterized by the equalization of marginal abatement costs is attainable depends on the formation of the transfer costs. When the marginal transfer costs are zero, we remain in the first best Paretian world. However, when the marginal transfer costs are positive, we are forced to move to the second best and the first best Partetian optimum is not attainable neither desirable. We also simulate a policy experiment in China to review the optimal abatement and transfer patterns between China’s provinces within a framework of imperfect lump-sum transfers. The welfare gains highlighted in the simulation provide support to take lump-sum transfers as a national climate change policy.