Comparative Analysis of Carbon Tax and Carbon Market Strategies for Facilitating Carbon Neutrality in China’s Coal-Fired Electricity Sector

Carbon taxes and carbon markets both contribute to mitigating carbon emissions in China’s power industry. Nevertheless, the pricing mechanism within China’s national carbon market, confined solely to the power sector, faces challenges in accurately reflecting the diverse costs of emission-reduction efforts across various regions. Similarly, carbon taxes encounter difficulties in effectively harnessing the inherent emission-reduction capabilities of power enterprises. This study investigates which carbon-pricing mechanism—a carbon tax or the carbon market—can better promote carbon neutrality in China’s coal-based electricity industry. Using a stochastic electricity price model, we reveal the price shocks of both a carbon tax and the carbon market under different carbon-pricing goals. Taking the China Carbon Emission Trading Market as the research object, the results are as follows: First, both carbon tax and the carbon market could significantly trigger price volatility in the coal-based electricity industry, while the carbon market’s shock effect on the industry’s emissions is more significant than that of carbon tax. Second, through both carbon-pricing mechanisms, emissions could be reduced by as much as 20%—a key premise of achieving this goal is keeping the carbon price at the level of 100 yuan/ton. Third, the volatility range of the electricity price, which is policy based, does not manifest the incentivizing effect of economic instruments on emission reduction in the coal-based electricity industry. Policy allows for an upper limit of 15% in the floating electricity price. By clarifying the linkage between carbon-pricing tools and coal-based electricity costs, this study contributes to developing a carbon-pricing mechanism that could help China’s coal-based electricity industry achieve carbon neutrality in a timely manner.