Energy conservation is a critical policy for China to achieve its economic growth objective within its resource and environmental constraints. I develop a nonlinear programming model to simulate a promising policy instrument—an interregional energy-conservation-quota trading system. A multivariate statistical approach is applied to identify an appropriate regional classification to aggregate provinces of China into trading regions. As with most energy and environmental policies in large countries, implementation will have to take place at the regional level. I show that delineating regions on the basis of socioeconomic and energy-environment characteristics would enable the conservation-quota trading system to function in a more efficient and equitable manner.
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