China’s national carbon emissions trading scheme: lessons from the pilot emission trading schemes, academic literature, and known policy details

ABSTRACT

Upon completion, China’s national emissions trading scheme (C-ETS) will be the largest carbon market in the world. Recent research has evaluated China’s seven pilot ETSs launched from 2013 on, and academic literature on design aspects of the C-ETS abounds. Yet little is known about the specific details of the upcoming C-ETS. This article combines currently understood details of China’s national carbon market with lessons learned in the pilot schemes as well as from the academic literature. Our review follows the taxonomy of Emissions Trading in Practice: A Handbook on Design and Implementation (Partnership for Market Readiness & International Carbon Action Partnership. (2016). Retrieved from www.worldbank.org): The 10 categories are: scope, cap, distribution of allowances, use of offsets, temporal flexibility, price predictability, compliance and oversight, stakeholder engagement and capacity building, linking, implementation and improvements.

Key policy insights

• Accurate emissions data is paramount for both design and implementation, and its availability dictates the scope of the C-ETS.

• The stakeholder consultative process is critical for effective design, and China is able to build on its extensive experience through the pilot ETSs.

• Current policies and positions on intensity targets and Clean Development Mechanism (CDM) credits constrain the market design of the C-ETS.

• Most critical is the nature of the cap. The currently discussed rate-based cap with ex post adjustment is risky. Instead, an absolute, mass-based emissions cap coupled with the conditional use of permits would allow China to maintain flexibility in the carbon market while ensuring a limit on CO₂ emissions.

KEYWORDS:

• Emissions trading
• carbon markets
• China
• climate policy
• China ETS

JEL:

• Q52
• Q54
• Q58

Acknowledgement

We are indebted to Frank Convery for suggesting this article. We further thank Zhuli Hess, Qin Hu, Ruijie Tian, Jianyu Zhang and Xiaolu Zhao as well as three anonymous reviewers for insightful discussions around emissions trading in China and for feedback on this manuscript. This research was conducted while Stoerk and Yang were employed at the Environmental Defense Fund. Stoerk now works as a Policy Officer at the European Commission. Stoerk’s contribution to this article reflects his personal views only and not necessarily those of the European Commission.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The recently opened pilot ETS in Fujian province is beyond the scope of this review.

2 NDRC initially considered covering eight sectors: petrochemicals, chemicals, construction materials, iron and steel, non-ferrous metals, paper, electricity, and air transport.

3 CGE results, on the other hand, have the disadvantage that the results do not always align with policy experience. In the EU ETS, for instance, CGE modelling studies predicted elevated rates of leakage ex ante, though this leakage seems to not have taken place (Dechezleprêtre, Gennaioli, Martin, Muûls, & Stoerk, 2015).

4 Please see the Supplementary Materials for an additional discussion of regional allocation (under 3.3.1).

5 News about the seminar published by NDRC: http://qhs.ndrc.gov.cn/gzdt/201704/t20170421_844991.html.