Addressing climate change through a market mechanism: a comparative study of the pilot emission trading schemes in China.

Abstract

The questions of how to mitigate climate change and its impact on human health are currently high on the Chinese agenda for future development. The emission trading scheme (ETS) has become one of China's most important instruments to address climate change through a market mechanism. In the wake of the evolution from regional pilots to a nationwide scheme, it is inevitable to be confronted with tremendous political-economic-institutional challenges. To facilitate a smooth start-up of the upcoming nationwide ETS, this study provides a systematic overview of seven ETS pilots, involving the detailed comparison of ETS design and the in-depth evaluation of market performance, both internal and external performance, based on trading data. Then, the achievements and deficiencies of seven ETS pilots are summarized, several challenges for the current time are discussed, and policy proposals for China's national-level ETS are navigated further coupled with international experience. This study finds that China's ETS pilots, from the short-term perspective, are successful, especially in the reinforcement of China's capacity to develop a market-based scheme in an economy that still cherishes many non-market endowments. However, deficiencies lie in both the internal and external market performance, such as the carbon price lacking a signal function, insufficient incentives for compliance, too low market liquidity, and much too high market fragmentation. Moreover, the retrospective examination of China's ETS pilots suggests that a nationwide ETS should at least be based on an extension of the cap duration from single year to several years, uniform rules on monitoring/reporting/verification and allowance allocation, and the improvement of institutional foundation.