Analysis and Optimization Suggestions on Allowance Allocation Methods of the Power Industry in the Carbon Market

Abstract

The initial allocation of carbon emission allowances is an important component of the carbon market. An equitable, scientific, and operational quota allocation method and quota management system are the cornerstones for ensuring the healthy operation of the carbon market. Owing to the high emissions, simple process, and good data foundation, the pilot and national carbon market in China have initially included the power industry in allowance management and introduced a common and differentiated quota allocation method. In this study, we compared the allowance allocation methods for the power industry and summarized the methods for key issues such as unit classification, correction factor, product measurement, and quota carry-over. We observed that there were concerns, such as lagging issuance time, lack of carry-over provisions, lack of regulatory mechanisms, and imperfect methods, in the first performance cycle of the national carbon market quota allocation. We improved the allowance allocation system for the power industry in the carbon market from the methodological and management perspectives, including establishing a total allowance constraint, clarifying quota carry-over provisions, improving the quota verification method for co-firing units, optimizing correction factors' selection, and introducing a compensatory distribution system in a timely manner.