Coupling compliance and voluntary carbon markets: a system dynamics assessment in China

The strategic coupling of compliance and voluntary carbon markets is emerging as a pivotal path for achieving cost-effective decarbonization. However, existing literature seldom captures the dynamic feedback loops, cross-sectoral heterogeneities, and environmental economic benefits inherent in dual-market architectures. To fill this gap, this study develops a sector-specific system dynamics model to evaluate the integrated impacts of coupling China’s Emissions Trading System (ETS) and the China Certified Emission Reduction (CCER) scheme. Three distinct scenarios are modeled: no carbon trading market (BAU), Single Market (ETS-only), and Dual Market (ETS + CCER). Results indicate that the Dual Market scenario achieves emission reductions (40.3%) and energy savings (39.7%) comparable to the Single Market scenario, while the unit abatement cost advantage widens from CNY 0.02 to 0.41 per ton of CO2, and cumulative employment losses are reduced by around 0.19 million. Sectoral analysis reveals the power sector is the predominant buyer in the CCER market, accounting for 59.5% of the total transaction volume, while the cement sector acts primarily as a net seller of carbon allowances in 2030. Sensitivity analyses further confirm the robustness and advantages of coupling markets. Policy implications include gradually reducing the free allocation rate from 95% to 90%, dynamically adjusting the CCER offset rate within 5%-10% under strengthened oversight, and establishing coordinated price mechanisms. These findings provide robust evidence for optimizing dual-market architectures to advance both climate targets and a just, resilient low-carbon transition.