Introducing Emission Trading Scheme To Accelerate Low-Carbon Transition in China’s Urban Central Heating

Accelerating the low-carbon transition of an urban centralized heating system is a key concern for policymakers. We propose a novel equilibrium analysis framework to assess the feasibility of implementing ETS in China's central heating sector. The results demonstrate that implementing an emission trading scheme (ETS) within the central heating sector can accelerate decarbonization process by shifting the focus of the current <i>Clean Heating Campaign</i> from gas boilers to industrial surplus heat and geothermal energy, aligning with China's goal of reaching 25% nonfossil energy by 2030. It can provide a more cost-effective and sustainable decarbonization pathway in which a 1% annual reduction in carbon quotas leads to emissions peak at 2033, as well as it is expected to generate significant co-benefits by reducing heating-related air pollution. A well-designed subsidy reallocation and phase-out strategy can enable the ETS to drive decarbonization and alleviate fiscal pressures. This combination of ETS and subsidies ensures a smooth transition to low-carbon heating in the short term and is sustainable in the long run through endogenous technological advancement and market self-regulation.