China’s carbon market: Development, evaluation, coordination of local and national carbon markets, and common prosperity

Abstract

Launching national carbon market with the power sector is a good start to achieve the commitments to both carbon peaking and carbon neutrality at the lowest cost. Since its operation, the carbon prices fall CNY40∼60 per ton. The block agreement transaction dominates trading, but with an average discount rate of 9.6% in block agreement, the aforementioned carbon prices overestimate the overall carbon prices. While the compliance rate measured against entities reached 94.4%, it differs significantly across provinces, ranging from 82.9% to 100%. Entities engaging in trading are mainly for compliance, and therefore transaction is driven by compliance. This article argues that the development of carbon market requires further reform of the electricity pricing mechanism and coordinated development of various related markets. The article argues that iron and steel, cement industry, and electrolytic aluminum should be given priority for inclusion of the national carbon market in the second batch, suggests necessity to establish a national carbon trading legislation and a scientific long-term mechanism for quota allocation, and emphasizes the importance of small entities in achieving the full compliance. Given the co-existence of national carbon market and regional carbon pilots, the article suggests the specific areas for the regional carbon markets to take the initiative to strengthen the synergistic effects of national carbon market. Furthermore, the article strongly recommends to continuously increase the proportion of carbon allowances auctions, and to set up a transformation fund from the proceeds of paid allocation of allowances to support regions at low levels of development and technology.