As countries prepare the next round of updates to their Nationally Determined Contributions (NDCs, expected in 2025), policymakers face a persistent dilemma: how to strengthen climate ambition without imposing disproportionate economic and trade burdens on certain countries or industries. A new study published in Energy and Climate Management offers a potential solution by redesigning how carbon prices are coordinated across regions.
The study introduces an NDC enhancement scheme based on a Differentiated Carbon Pricing Mechanism (DCPM), which links regional carbon prices to carbon intensity under a cost-fairness principle. Rather than imposing a single global carbon price or uniformly scaling up existing targets, the approach allows countries to face different carbon prices while contributing to the same global climate goal.
Using a global computable general equilibrium (CGE) model, the authors compare the proposed DCPM-based scheme with two commonly discussed alternatives: a constant emissions ratio scheme, which proportionally scales up current NDCs, and a uniform global carbon price scheme, which equalizes carbon prices across regions. All schemes are evaluated under an identical global emissions constraint consistent with the 2 °C temperature target.
"Our results show that how countries coordinate carbon prices matters as much as how ambitious the global target is," said Ying Fan, corresponding author of the study and professor at Beihang University. "A differentiated carbon pricing approach can significantly reduce unequal competitiveness impacts while still delivering the required global emissions reductions."
The team published their analysis in Energy and Climate Management on December 9th, 2025.
The analysis focuses in particular on energy-intensive and trade-exposed (EITE) industries, which are often the most vulnerable to climate policies. Under a uniform global carbon price, high-carbon-intensity regions experience sharp declines in industrial output and net exports, while cleaner regions gain competitiveness advantages. By contrast, the DCPM-based scheme produces more balanced outcomes, limiting extreme losses in vulnerable regions and sectors.
The study also examines impacts on regional household welfare. While the uniform carbon price scheme achieves the lowest global economic cost, it generates highly uneven welfare losses across countries. The DCPM-based scheme slightly compromises global cost efficiency but substantially improves equity, reducing the dispersion of welfare impacts and avoiding disproportionate losses in developing and high-carbon-intensity economies.
"Competitiveness concerns are not just a political excuse—they are rooted in real economic effects," said Xilong Yan, first author of the paper. "If climate policies impose excessive burdens on certain regions or industries, they risk weakening support for stronger climate action. Our framework shows a feasible way to reconcile ambition with acceptability."
Beyond numerical results, the study proposes a multi-dimensional evaluation framework that jointly assesses effectiveness, competitiveness impacts, and equity. Across these dimensions, the differentiated carbon pricing scheme consistently outperforms proportional target scaling and shows a more balanced performance than a uniform carbon price.
The authors emphasize that the proposed scheme is not intended as a perfect or final solution, but as a pragmatic step toward more coordinated and politically feasible climate action. As international discussions increasingly turn to competitiveness, carbon leakage, and trade measures such as carbon border adjustments, differentiated carbon pricing may offer an alternative path that reduces the need for unilateral trade interventions.
Looking ahead, the researchers suggest extending the framework to incorporate additional equity principles, non-pricing policy instruments, and international climate finance mechanisms. "As countries move toward updating their 2030 and 2035 pledges, designing coordination mechanisms that balance efficiency, equity, and competitiveness will be crucial," Fan said.
Other contributors include Lianbiao Cui from School of Statistics and Applied Mathematics, Anhui University of Finance and Economics.
This work was supported by Projects No. W2412161 and 724B2003 of the National Natural Science Foundation of China.
