Impacts of local and regional carbon markets in Hong Kong and China's Greater Bay Area: A dynamic CGE analysis

We examine the potential economic impacts of local and regional carbon markets in Hong Kong and China's Greater Bay Area, taking a computable general equilibrium approach. We find that Hong Kong's proposed carbon-neutrality target requires policy-compliance costs as large as ≤21.0 % of its baseline gross domestic product, but regional cooperation can help reduce the costs substantially. For example, the costs will decline by ≤23.0 % if Hong Kong forms an integrated carbon market with Shenzhen. The cost savings will further increase to ≤38.2 % if Hong Kong cooperates with Shenzhen and Guangdong to create an extended regional carbon market. Such an integrated carbon market will be mutually beneficial, and will also help Shenzhen and Guangdong meet their own carbon-reduction goals at ≤13.9 % and ≤5.2 % lower costs, respectively. These regional cooperation scenarios, though benefiting all participants, will make Hong Kong—which sets an ambitious climate-mitigation target at the city level, despite its tiny local carbon market—the biggest winner. Accordingly, Hong Kong has a great incentive to promote an integrated regional carbon market, but increasing its feasibility may require an institutional device to reduce the imbalance in benefit across regional stakeholders. • Compliance with carbon-neutrality targets is extremely costly in China's context. • Regional ETS linkages can help reduce the compliance costs substantially. • Regional carbon markets benefit all participating Chinese GBA stakeholders. • The benefits are not evenly distributed, and lean toward Hong Kong. • Institutions to reduce imbalance in benefits distribution can enhance feasibility.