Carbon emissions trading in China: the evolution from pilots to a nationwide scheme

Abstract

The Chinese central government has approved seven pilot carbon trading schemes. These pilot regions have been deliberately selected to be at varying stages of development and are given considerable leeway to design their own schemes. These schemes have features in common, but vary considerably in their approach to issues such as the coverage of sectors, allocation of allowances, price uncertainty and market stabilisation, potential market power of dominated players, use of offsets, and enforcement and compliance. Our study finds that educating the covered entities, strictly enforcing compliance rules, ascribing allowances as financial assets and defining their valid duration, and including non-compliance in the credit record of non-complying entities are crucial to enabling active participation in carbon emissions trading. Moreover, the retrospective examination of the carbon trading pilots suggests that a national emissions trading scheme (ETS) should at least be based on uniform standards for measuring, reporting, and verification, the allocation of allowances, and the rules of compliance. Until a nationwide carbon market becomes fully functional after 2019, regional ETSs continue to function in parallel but those entities covered in the existing regional ETSs will be unconditionally integrated into a nationwide ETS if they meet the latter's threshold.Policy relevanceThe purpose of launching the seven carbon trading schemes and the reason why these seven pilot regions are given considerable leeway to design their own schemes are to enable China to develop a nationwide ETS with expanding geographical coverage and sectoral scope to complement the administrative means on which China, to date, has predominantly relied to achieve its increasingly stringent energy-saving and carbon intensity goals. This article discusses the lessons that carbon trading pilots have learned either from their own practice or other pilots in the first compliance year, as well as the good practice that the to-be-established national scheme could follow, and discusses the potential pathways for the evolution of regional pilot carbon trading schemes into a nationwide carbon trading scheme. Insights into the design, implementation, and compliance of China's carbon trading pilots and potential pathways help make these pilots work reliably and effectively and will smooth the transition from the pilots to a national ETS.