Does china’s national carbon market function well? A perspective on effective market design

Abstract

The emissions trading scheme (ETS) has piqued substantial interest among economists and policymakers. China officially launched the electricity sector’s national carbon emissions trading market in 2021, making it the world’s largest compliance carbon market. In contrast to the cap-and-trade (C&T) system prevalent in other economies, China’s national carbon market employs a rate-based mechanism that implicitly subsidizes the output of regulated entities; however, is it effective? This study uses a market-design theoretical framework to explore whether China’s national carbon market functions effectively and, more critically, what leads to its (slight) underperformance. We discover that policy design, policy conflicts, policy uncertainty, inexperienced market regulation, and excessive or inappropriate government intervention are the primary constraints on this emerging market, resulting in shrinking market thickness, congested market transactions, and lack of safety. For China to establish a better national carbon market, stronger market-oriented rules, appropriate market regulation, improved policy coordination, and greater electricity market reforms are required.